Many Florida residents have opted for a deed in lieu of foreclosure instead of modifying their loan or doing a short sale of their property. A Deed in lieu of foreclosure is a deed instrument in which a borrower conveys all interest in their property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.
The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. It also avoids the long and protracted process of going through foreclosure which often increases the amount of the deficiency due to attorneys fees incurred by the lender to prosecute the foreclosure.
Just as in a short sale or loan modification, the lender must agree to a deed in lieu of foreclosure. If the lender agrees to accept a deed in lieu, the borrower will need to sign an Agreement with the lender to transfer all interest in the property in lieu of foreclosure as well as a deed for the property deeding it over to the lender. Once the Agreement is signed and the deed is executed, the lender will then mark the Note that secures the Mortgage as being paid. The lender will then provide the borrower with documentation that the mortgage debt is canceled and also waives the right of the lender to seek a deficiency balance of the difference between the original balance then due on the note and the amount the lender receives when the property is eventually sold.
The executed paid Note, Agreement for deed in lieu, and warranty deed are then sent to a Title & Escrow company to process the transaction and record the deed transferring the legal interest in the property back to the lender. Once the transaction is consummated, the paid Note is then sent to the borrower releasing them from financial responsibility of the Note and Mortgage.
A deed in lieu can have several tax consequences that homeowners must be aware of. Whenever a debt is forgiven, the resulting forgiveness can be counted as income by the IRS. Thanks to the Mortgage Forgiveness Debt Relief Act, any debt forgiven between 2007 and 2012 on a borrowers principle residence may not be counted as income by the IRS if certain conditions apply. As previously stated, it must be the borrower’s principle residence so investment or second homes or rental properties will not be eligible for forgiveness. The IRS’s rules for a principle residence dictate that the borrower must own and occupy the property for two years or 730 days but it does not need to be concurrent. Any absence of over one year will not be counted as occupancy. Additionally, the Act limits the amount of forgiveness to two million dollars. If the debt forgiven on a refinance of a property, then only the original balance of the mortgage that was refinanced will be considered for forgiveness. Any excess or “cash out” will not be eligible for forgiveness under the Act. In order for the debt not to be considered as income, the borrower must report the debt on IRS form 982 and included with their tax return. The Florida Consumer Law Center, P.A. is not a tax professional so do not consider this tax advice. Please see a tax professional for guidance on tax consequences of a deed in lieu or short sale.
As with any situation where a borrower is not fulfilling their obligations for repayment of a mortgage, a Deed in Lieu will have adverse ramifications to their credit rating. However, it will prevent a foreclosure from appearing on their credit and which some believe will have a greater negative impact on a borrower’s credit. After seven years, the Deed in Lieu can be requested to be removed from the credit score and the bureaus must comply and remove it from the credit report.
The borrower may begin to rebuild their credit immediately after the Deed in Lieu is executed and completed. The Florida Consumer Law Center, P.A. also offers credit repair and information on how to rebuild your credit. Click here for information on the services we provide for credit repair and rebuilding.
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Florida Consumer Law Center, P.A.
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