Deed in lieu vs. forclosure

[frenze367]

I'm curious which route would be better for my family. We are entering the foreclosure process and have been offered a deed in lieu package from our PMI holder. They want $18,000 paid over 15 years to satisfy the debt. The issuing bank hasn't said anything about what it wants. The home has been on the market for almost 4months and we recently found out it was not listed at a fair market price--its value kept falling. I guess that time doesn't count. Our payoff is roughly $230,000 and the house is valued around $80,000--no refinancing.

At this point combining what the PMI holder is asking for and what the bank will ask for is it better for us to roll the dice on the bank not pursuing a deficiency judgment? If not can we counter their offer?
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[Marshall Rosenbach Esq.]

I would definitely counter that offer. Explain to them that you are underwater by more than $150,000! Do you only have two mortgages on the property? How much is the total amount owed on the 2nd mortgage?

[frenze367]

Thanks for your quick reply. We only have one mortgage. We built the house in 2007 for $220,000 paying just closing costs. With the delinquency fees our payoff is near $230,000.

If I understand correctly, negotiating the deed in lieu is the better solution when compared to going into foreclosure? If the lender is protected by the PMI company and a deed in lieu is agreed upon then the lender has no right to pursue a deficiency judgment against us. Is that correct?

Thanks.

[faith]

Frenz367,,

A deed-in-lieu is better than a foreclosure; a short sale might still be your best option. A short sale is when the lender agrees to take less than what is owed on the mortgage. Several conditions apply. Short sale is far less destructive to your credit rating than a foreclosure or deed in lieu, as it is supposed to be listed as a “settled debt” on your credit report. However, it is still harmful to your credit score and can reduce it by 100- 200 points. It will relieve you of the burden as well as the cost, emotional strain and embarrassment of a messy foreclosure procedure

A deed-in- lieu is a faster solution than a short sale and that it is more likely to be acceptable to the lender. The ramifications to your credit score are about the same as the short sale. If the lender eventually sells the home for a price that doesn’t pay off the original mortgage amount, he can get a deficiency judgment. This is a court judgment against a borrower, which can be requested by the lender who has not received full payment of the amount owed, and try to collect it from the homeowner. However, this doesn’t happen simply because he knows that there is no money to recover and that he will have to pay all the costs of the legal action. And if you have purchase money mortgage and never refinance your lender can not pursue you for any deficiency judgment according to CA Section 580b.

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.

Your home must be your principal residence in which you and family lives. It includes the conventional single family home, condominium or cooperative, a mobile home or a duplex. If the taxpayer has more than one residence, it is the home in which the taxpayer lives most of the time.

As far as your PMI asking you to sign a promissory note you can negotiate it by settling for the lowest amount. Make a counter offer of $5,000, payable in two years no interest and put it writing that they will not pursue a deficiency judgment against you. Actually if the house forecloses, the 2nd will be wiped out and you are protected by CA Section 580b. Wait, didn’t you see say there’s only one mortgage and you did not refinance? If this is the case you are protected by CA Section 580b and your lender is making this $18,000 as a condition to accept a Deed in Lieu. Tell them you will not sign the promissory note and let the house foreclose. Foreclosure, Deed in Lieu and Short Sale will affect your credit, but nowadays, almost everyone is affected by these market crises.

Any debt forgiven is considered income so the lender will be required to file a 1099-A with the IRS showing the deficiency which might have tax implications. Your lender will be sending you 1099. Once you get this form, you need to complete IRS form 982 to report how much the debt was forgiven by the lender. If you have not received the 1099C you have to call your lender and ask for your copy, it might be lost in the mail or they forgot to mail you one.
If you have not received the 1099C, you still have to complete IRS form 982 to put how much debt was forgiven by your lender. If you don’t they will assume that it is an income and is not covered by Debt Forgiveness Law signed in 2007.

Here’s the link for IRS Debt Forgiveness Act

http://www.irs.gov/individuals/article/0,,id=179414,00.html

The above statements are for information only..

Thank you.