Deed in Lieu Approval Process:

Each state is different but California’s process is something like this: Both you and the lender will sign two legal documents, an agreement and a deed (warranty, quit claim, or a grant). The agreement describes the terms and conditions of deal including: a promise by the lender not to initiate foreclosure proceedings; a promise to terminate any existing foreclosure proceedings; and a promise to forgive any deficiency (the amount of the loan that isn’t covered by the sale proceeds) that remains after the house is sold. The deed, gives legal ownership of the property to the lender.

The lender then confirms that your loan is “paid in full” and gives you two forms: One states that your debt is canceled; the other refers to the waiver of the right to a deficiency judgment (the lender’s right to ask for the unpaid debt amount if it is not recovered totally by the sale of the property).

Other topics to learn about:

• My Options | Avoid Foreclosure
• Why Short Sale | Advantages
• Short Sale FAQ
• Deed In Lieu FAQ

Credit: How a deed in lieu affects your credit?

Fair Issac and Company FICO seems to have purposely designed the credit scoring to be hazy.  With respect to the major workout options, the consensus seems to be that computer scoring works like this:

Short Sale (the least amount of damage)
Deed in Lieu
Foreclosure.

Many sources claim a short sale hurts your computer credit score and or your ability to qualify for loan programs  for 2-3 years, a deed in lieu of foreclosure for five years and a foreclosure for seven to ten years.

(if your property is in San Diego, Orange or Riverside counties you may wish to discuss short sale strategies designed to prevent banks from reporting 30, 60, or 90 day lates.)

Note: Your credit history may not soley be reviewed by a computer.  A person reviewing your credit history may look more favorably on a short sale or a deed in lieu.  Short sales and deeds lieus manifest your cooperation with your lender.

Taxes: Deed and lieu and taxes?

The laws regardling how Short Sales and DIL may affect your tax liability are changing everyday. Please contact me for the most up-to-date info on this topic. Here are the recent laws pertaining to tax consequences for Short Sales and DIL. Remember there is both Federal and State tax laws.

It is possible that a deed-in-lieu of foreclosure may generate taxable income based on the amount of your “forgiven debt. In other words, you might have to pay income tax on the amount of money remaining on your loan that was forgiven by the lender.

Here is why: You did not owe taxes on your original load because you were required to repay the loan (it was not a “gift”). However, when you agreed to not repay the entire amount of the loan, and the remainder of the debt was forgiven, the amount that was forgiven becomes “income” on which you owe tax.

Therefore, a short sale may peg some people with exposure for loan forgiveness taxes.  Taxes they would not have to pay if they negotiate a deed in lieu or accept a foreclosure.  If you have purchase money loans you should probably speak with an attorney before agreeing to do a short sale.  A deed in lieu or a walk away may avoid a big tax bill to the state of CA.

Additionally a deed in lieu gives the borrower a chance to negotitate the fair market value of the property.  (this may substantially alter tax liablity ).

Note: see IRS link Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 through 2012.

California-Federal Differences Taxes: Currently Jan 1 2010 CA tax law does not follow Federal law.

The FTB notes that while the California legislation is similar to federal law, there are important differences. The California law covers qualified debt forgiven in 2007 and 2008. The federal law, which originally covered debt forgiven from 2007 through 2009, was extended by the Emergency Economic Stabilization Act of 2008 (H.R. 1424) to cover debt forgiven from 2007 through 2012.

The California law limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately. Also, the California law limits debt relief to $250,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/RDP filing separately. The federal law, on the other hand, limits the amount of qualified principal residence indebtedness to $2 million for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1 million for taxpayers who file as married filing separately. Furthermore, the federal law does not limit the debt relief amount.

Deficiency: Am I liable for deficiency?

In California there is a presumption that a deed in lieu of foreclosure will release the seller from financial liability for the underlying notes or loans.

Note:  there are wrinkles that some lenders like to include in their deed in lieu documents.  Be on your guard for lenders who are reserving the right to foreclose to clean up title.

• California short sales are becoming more common but difficult, but can be done if done correctly.
• Many seconds lien holders and some first lienholders are unwilling to release the sellers from a deficiency.  – Sometimes the lenders just need to have the law explained to them. A good short sale agent and negotiator will help make sure you get “relief of debt” “lien release” on you credit report and endorsed signature docs for your short sale and deed in lieu.
• There are many  strategies open to sellers while they are still current on you mortgage. Though more difficult a short sale which still current is less damaging on your credit. The late payments are what damage you credit, not so much the short sale or deed in lieu.
• Do not stop paying your loans until you have set up your walk away plan or workout strategy.
• If someone is telling you a short sale will save you, make them put it in writing.
• Remember a Realtor is not licensed to explain what the escrow instructions mean to you or whether your are released from a deficiency.
• If someone tells you to sign the paperwork – ask him to guarantee your release from a deficiency in writing.

DIL advantages to the lender include: the ability to receive title to the property immediately instead of having to wait for months for the foreclosure process to complete; significant financial savings on court costs and lawyers’ fees; and, it enables them to resell the property so they can recoup some of their investment.

Before approving a deed-in-lieu of foreclosure transaction, the lender will require that your home be put on the market (listed with a real estate agent) for at least 30 days (three months is typical) and that there are no other liens on the property. Lenders would prefer that you sell the property rather than they assuming responsibility to sell it.