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3 reasons a deed in lieu of foreclosure is not a good deal

by | Jun 23, 2021 | Blog

According to the Consumer Financial Protection Board, 2.1 million families owe a minimum of three months’ worth of mortgage payments. They are at risk of foreclosure, among the 11 million households in peril of ending up homeless in 2021.

There are options to combat foreclosure, but not all of them may be of great benefit to homeowners. A deed in lieu of foreclosure is exactly what it sounds like — an individual gives the deed of the house to the mortgagee to avoid foreclosure. While there are situations where one may help, in general, a deed in lieu of foreclosure is not a good deal.

1. Homeowners still lose their homes

In the end, individuals lose the right to remain in their homes. Their name is no longer on the title. While this may occur with other options, there are also ones where people may keep their properties.

2. Homeowners may incur tax debt

The worst disadvantage of a deed in lieu of foreclosure is that even though the lien is gone, the homeowner may still be on the hook for taxes on the amount of debt erased. The IRS may see the forgiven arrears as taxable income, leaving the person still owing tens of thousands of dollars.

3. Homeowners still suffer credit score damage

Even though the hit may not be as severe as with a foreclosure, individuals still see a reduction in their credit score. The presence of a deed in lieu of foreclosure on a credit report may also result in difficulty qualifying for another mortgage in the future.

A foreclosure is a terrifying prospect, but not a hopeless one. A deed in lieu of foreclosure comes with many downsides, but there exist other recourses, such as bankruptcy and loan modifications.


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