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Barrister
Barrister, Lawyer
Category: Real Estate Law
Satisfied Customers: 33716
Experience:  15 years real estate, Realtor. Landlord 26 years
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I own a property in CA that has been rented last nine years

Customer Question

I own a property in CA that has been rented for the last nine years to a non profit but it was originally my residence. The mortgage has gone up and I can no longer make payments or get it refinanced because technically I don't have an income. I do have about 40,000 in savings. I want to do a deed in lieu instead of a foreclosure but to do that I have to disclose my savings and am concerned about that as well as tax/financial responsibility and what the mortage company might come after me for. The amount owed on the house is very close to what it would sell for though.
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Barrister replied 1 year ago.

Hello and welcome! My name is ***** ***** I will try my level best to help with your situation or get you to someone who can.

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Is there some reason why you don't just sell the house and kick in enough money to make up any shortfall in the mortgage?

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Have you talked to the lender about the possibility of a short sale?

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What is your legal question I can help with tonight?

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thanks

Barrister

Customer: replied 1 year ago.
As far as I understand a deed in lieu is just an easier way to do a short sale. I don't have the money and don't want to invest in the house further. My question is what are the legal/financial/tax repercussions of doing a deed in lieu?
Expert:  Barrister replied 1 year ago.

They are a little different.. A deed in lieu (DIL) is where the owner transfers the property back to the lender and they forgive any outstanding debt. So they essentially trade the outstanding debt for the house.

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A short sale is where the lender agrees to allow the owner to sell the property for less than what is owed on it.

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If the lender agrees to do a DIL, they are buying the property back from you for what is owed, so you deed it back and they cancel the outstanding loan. Then when they sell it, whatever they sell it for is theirs. The lender might consider doing this if the amount owed is close to what the house is worth.

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But you are correct that they may also refuse once they find out you are sitting on $40K that could be used to continue to make the payments on the house. They will normally only consider a DIL or short sale if the borrower is in financial distress and has missed at least 3 payments.

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With that said, if these are retirement savings, like an IRA or 401K, then they don't "count" as much because you can't really access that money without substantial penalties so that may not affect their decision. If they are just normal savings in a savings account, then they "count" because they can easily be used to make the payments.

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As for the tax consequences, if the lender files a 1099-C once they sell the property, then you could have an income tax hit because any forgiven amount over what they sell the property for would be considered income to you and you would have to pay income taxes on it.

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thanks

Barrister

Customer: replied 1 year ago.
That helps a lot, so IF the lender agrees then all is fine, but if they don't then I have to let them foreclose. I can try to argue that the savings are what I need to live on since I don't have a job. Awesome!! Thanks.
Expert:  Barrister replied 1 year ago.

Correct. If they actually foreclosed, then if this was your primary residence when you initially took out the loan, then they can't come after you for any deficiency if it doesn't sell for what is owed. So you can always fall back on the foreclosure angle if they won't agree to work with you on another solution like a DIL or short sale..

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thanks

Barrister

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