A DEED-IN-LIEU of foreclosure is not such a good opportunity (in this writer’s opinion) for a borrower/mortgagor/homeowner to transfer all interest in the property back to the mortgagee/lender/lienholder.
Some people call this “DEED-IN-LIEU” procedure a “Strategic Default” or “Cash for Keys”.
In exchange for receiving the DEED-IN-LIEU, the lender/lienholder would not move forward with the foreclosure. The borrower/owner gives the property to the lender in exchange for lender canceling the loan and promising not to start or complete foreclosure proceedings. However, the lender should also agree in writing to this forgiveness of any deficiency (amount of loan that isn’t covered by the sale proceeds) remaining after property is sold.
Anyone considering DEED-IN-LIEU as foreclosure avoidance option should consult with a lawyer about rights and responsibilities after transferring the property and about negative impact on your credit history and FICO scores.
Getting a lender to accept a DEED-IN-LIEU of foreclosure would be very challenging, and some want cash, not real estate.
Beware of adverse tax consequences ~ A DEED-IN-LIEU might generate taxable income for the owner/borrower based on the amount of “forgiven debt.” Ordinarily, when debt is forgiven or canceled by a lender, that amount forgiven is considered income for tax purposes, whether the debt is a mortgage or another kind of credit. So owner/borrower must report amount of the canceled (or forgiven) loan on tax return and pay taxes on it. In other words, when it is clear that borrower won’t be repaying the money received, tax law would recognize that as income.
Property owner/borrowers who are considering a DEED-IN-LIEU of foreclosure should be very careful.
California is a non-judicial foreclosure state where rules on property foreclosure are different than many other states.
The owner/borrower should consult with legal and real estate professionals to learn options and determine whether a SHORT SALE is possibly a better choice.
Source of some information here is Melissa Zavala, Realtor and real estate blogger ~ “Short Sale Expeditor” @ www.ShortSaleExpeditor.com
Harrison K. Long – solutions for real estate and business – REALTOR® and broker associate, GRI – Coldwell Banker Residential Brokerage – 949-854-7747 (phone) – ExploreProperties@gmail.com (email) – CA DRE 01410855 – SFR short sale and foreclosure resource certified by the National Association of REALTORs® – also now serving as a director at California Association of REALTORs®.