What is a Deed in Lieu of Foreclosure?

Deed in Lieu of Foreclosure is when a homeowner simply gives their home back to the lender because they can't afford to make the payments. Instead of going through the foreclosure process, the lender puts the home on the market to recoup the loss. This process makes the lender happy because they don't have to waste time and money on the litigation required to foreclose. It works to keep the horrible foreclosure blemish off of your credit.

The Process

When you do a deed in lieu of foreclosure, you will have to sign some legal documents, such as the Agreement in Lieu of Foreclosure and a Warranty deed, quit claim deed or a grant deed. The agreement is signed by both the borrower and the lender, to provide the terms of conditions. The second is the actual deed which transfers ownership away from the borrower. 

Tax Implications

Borrowers may have to pay two different taxes on a Deed in Lieu of Foreclosure: a deed tax and income tax on the canceled debt. The deed tax is based on the difference in the value of the home and the mortgage, and may vary from state to state. The tax on the canceled debt will be sent to the borrower on a 1099-MISC.

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