|
If foreclosure of a mortgage becomes imminent, with all other alternatives for recovery exhausted, the best option may be to give up the property in an attempt to control further financial damage. Conveying a Deed-in-Lieu of Foreclosure may be the most practical instrument to help address the outcome of credit scores, income taxes, and other financial responsibility issues all at the same time. Since different types of loans each have their individual restrictions on a Deed-in-Lieu of Foreclosure, the lender's loss mitigation department will need to be contacted for specifics regarding qualifications and restrictions.
In a Deed-in-Lieu of Foreclosure transaction, a borrower gives up all interest in the real property, essentially turning over the deed in order to avoid the court's foreclosure process. The biggest difference between a court foreclosure and a Deed-in-Lieu is that in a traditional foreclosure, the borrower maintains responsibility for the difference between the debt owed and the price obtained by the lender when the property is resold. Alternatively, a Deed-in-Lieu releases the borrower from personal indebtedness for any part of the defaulted loan. This can serve to protect the borrower from an adverse impact to the credit score if the lender is willing to negotiate the terms of the contract to include marking the account as paid in full.
Borrowers need to be aware that there are income tax implications in any property transaction where the sale is short of the value of the lien. If, in a simplified example, the borrower owes $150,000 on the mortgage of a home that has been foreclosed and subsequently sold by the lien holder for $130,000, the borrower may be held responsible for income tax on the $20,000 difference if that amount of the debt was forgiven. The Internal Revenue Service looks at this difference as taxable income or gain. There are special cases in bankruptcy or insolvency in which taxes do not apply, however, so it is wise to contact a tax professional or attorney if there are qualification questions. If taxable, the borrower should keep in mind that he/she will be further ahead owing tax on a forgiven debt than in having a judgement issued requiring repayment of the full shortfall.
If there is a second mortgage or outstanding equity loan (junior loan) secured against the property, it usually must be paid in full before a Deed-in-Lieu of Foreclosure can be executed. Exceptions to this qualification are rarely made, but if the junior loan amount is small, your lender may be willing to consider a request for other arrangements. Remember that the lender wants to collect as much payment due as possible so suggestions to pay off the junior loan owed to a different lender are not likely to be forthcoming. This is something you need to take care of before applying for the Deed-in-Lieu of Foreclosure.
In certain circumstances, the terms of a Deed-in-Lieu of Foreclosure for a HUD mortgage may also provide the borrower with up to $2000 in cash compensation. However, there are strict rules of qualification for this compensation. One of those rules is that the borrower must be a current resident of the property except when having vacated it as part of remedying the reason for foreclosure; for instance, relocating to regain employment. There are additional rules regarding time constraints for application, documentation of reasons for default, the use of the funds, and the condition the property is left in. Specific statements of qualification can be found in a document created by the Department of Housing and Urban Development (HUD) at: http://portal.hud.gov/fha/sf/svc/faqdilfact.pdf .
In a traditional foreclosure, when the borrower is unwilling or unable to participate in a Deed-in-Lieu of Foreclosure transaction, the legal process can take up to two years. Ultimately, the borrower may receive a judgement from the court requiring repayment of the deficiency between sale price and total indebtedness, including legal expenses, interest, and administrative fees. The Deed-in-Lieu saves the borrower from having to repay these significant expenses as well as relieving him/her from responsibility for the shortfall of the original debt.
Lenders are willing to participate in the Deed-in-Lieu process not out of the goodness of their hearts but because it provides a way for them to avoid unnecessary expenses and the years' worth of time involved in the foreclosure process even though they are temporarily stuck with a non-performing asset. The Deed-In-Lieu agreement also includes specifics regarding the condition the house is left in, such as requiring that it be vacated and free of personal property by an agreed upon date, which can save the lender from having to deal with personal property disposal issues. Once the transaction has been completed, the lender is free to sell the property immediately, thereby mitigating any additional losses.
Performed in a timely and cooperative manner, a Deed-in-Lieu of Foreclosure can result in best-case outcome for everyone involved in a situation where there can be no real winners.
|
