There is an unprecedented number of families faced with the possibility of foreclosure. A “foreclosure in the making” situation looks something like this: you are financially strapped, have missed consecutive monthly home mortgage/equity payments, and have been unsuccessful in trying to sell your home to repay the loan(s).
If you have reached this point and becoming willing to give up your home, however want to avoid foreclosure, you should be aware of two other options: Short Sale and Deed in Lieu of foreclosure deals. You will still lose your home and have a negative impact on your credit rating by implementing either of these choices, but they are less agonizing than foreclosure.
A deed in lieu associated with foreclosure also might help your probability of getting another mortgage loan in the future, and it will definitely help avoid the actual legal process of home foreclosure. Although it has a negative affect your credit rating, deed in lieu of foreclosure might be less harmful than a foreclosure.
The advantages to the lender contain: the ability to receive title towards the property immediately instead of having to wait months for the foreclosures process to complete, significant savings on court costs as well as lawyers’ fees and, it enables them to resell the property so they can make back a larger portion of their investment.
Before authorizing a deed in lieu of foreclosure purchase, the lender will require that your house be put on the market and listed with a real estate agent for 30 days – 3 months and that there are no other liens on the property. Lenders would prefer that you sell the property as an alternative so they don’t have to assume responsibility.
If you foresee, or perhaps are experiencing problems making the mortgage payments, contact a Realtor or nonprofit firm that can help you negotiate with the lender.
What Will Happen?
The process for approving a deed in lieu of foreclosure seems to be something like this; Both you the homeowner and the lending company will sign two legal documents, an agreement and an action (warranty, quit claim, or possibly a grant). The agreement identifies the terms and conditions of deal including: a promise from the lender not to initiate foreclosure proceedings or if they have began the lender will terminate any existing foreclosures proceedings. The lender will forgive any deficiency (the amount remaining of the loan that isn’t covered by the sale of the house) that remains after the house is sold. The deed, provides legal ownership of the property to the loan provider.
The lender then confirms that your particular loan is “paid in full” and offers you two forms: One says that your debt is canceled and the other refers to the waiver of their rights to an insufficiency judgment (the lender’s ability to ask for the unpaid financial debt if it is not recovered completely by the sale of the property).
It is possible a deed in lieu of foreclosure may produce taxable income based on the level of your forgiven debt. In other words, you may have to pay income tax on the sum of cash remaining on your loan that’s forgiven by the lender.
This is why: You did not owe income taxes on your original loan balance since you were required to repay the loan (it had not been a “gift”). However, when you decided not to repay the entire quantity of the loan, and the remainder of what you owed was forgiven, the amount that is forgiven becomes “income” on which you owe a tax.
The IRS is alerted of this when the lender sends the IRS Form 1099C, that reports the forgiven financial debt as income to you.
However, there might just be help available. The Mortgage Debt Relief Act of 2007 usually allows taxpayers to be able to exclude income from relieved debt on their principal residence. Debt reduced through the restructuring of a home loan, as well as the mortgage debt forgiven in connection with a foreclosure, is provided relief under this act.
This part applies to debt forgiven within calendar years 2007 – 2013. Up to $2 million in forgiven debt is eligible for this particular exclusion ($1 million if betrothed and filing separately).
Please keep in mind, to contact a lawyer or tax advisor about benefits and consequences in regards to taxes or special circumstances.