A deed in foreclosure is a document that transfers the home's title to the bank that owns the mortgage, in exchange for the mortgage debt being relieved. The deed is part of public records and is signed by the homeowner. In Illinois, the deed in lieu of foreclosure is a remedy created by the Illinois Mortgage Foreclosure Law (IMFL).
When Can I Use a Deed in Lieu of Foreclosure?
- It may be used before a foreclosure lawsuit is filed.
- It is also available once a lawsuit has been filed.
If a lender accepts a deed in lieu of foreclosure, the homeowner literally deeds the property to the lender. In exchange, the lender waives the right to pursue the homeowner for any deficiency amount. A deficiency is the difference between the current market value of the home and the current balance of the mortgage loan.
When Is a Deed in Lieu of Foreclosure NOT Granted?
While a deed in lieu is a powerful remedy, they are not frequently granted, such as in the following situations:
- If there is a second or third mortgage: Most lenders will not accept a deed in lieu if there is a second or third mortgage on the property. This is because the lender would be taking the property subject to the junior mortgages - it would not be obtaining free title to the property. In order to resell the property, it would have to pay off the other mortgages.
Other liens against your home: Similarly, if there are other liens against your home such as judgment
liens or mechanic's liens, the lender will require that you cure those
liens before accepting a deed in lieu.
- In addition to that requirement, lenders will commonly require you to list your home for sale for a period of 90 days and provide financial documentation that establishes you have a valid hardship. Being underwater is not necessarily a financial hardship unless other circumstances help establish that a hardship exists.
It is not possible to force a lender to accept a deed in lieu of foreclosure - it must be agreed to by both parties.
What About Taxes?
In some situations, a lender may send you an IRS Form 1099 reflecting the amount of the deficiency. In the past, this would have been considered taxable income as cancelled debt. However, if the home was your primary residence, and the value of the loan was under $2 million ($1 million for married couples filing separately), then this type of income is not taxable through December 31, 2012, pursuant to the Mortgage Forgiveness Debt Relief Act of 2007. Congress recently extended the protection of the Mortgage Forgiveness Debt Relief Act through December 31, 2013.
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