A common way to avoid your property being taken away by the lender on account of non-payment of your mortgage is a deed-in-lieu of foreclosure.

Deed-in-lieu is a process in which the borrower failing to satisfy the loan obligation hands over his property to the lender. The lender may then sell the property in order to retrieve a part or whole of the amount borrowed from the sale proceeds.
What is the process all about?
The process involves the signing of legal documents - the Agreement in Lieu of Foreclosure and a Warranty deed, quit claim deed or a grant deed. The first document reveals the terms and conditions of the deed-in-lieu, and is signed by both the lender and borrower. The second document, which is the deed, conveys legal ownership of the property to the lender.

The lender marks the borrower’s note as “paid” and provides the latter with two forms - one which states that the debt is canceled and the other which 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 property-sale).

The agreement for deed-in-lieu is executed through an escrow company which receives the borrower’s note (marked as “paid”) from the lender. The escrow then records the deed used for transferring legal ownership of the mortgaged property and sends the note to the borrower. The borrower is thus released from the liability of the mortgage payments.

Does a borrower need to pay tax in the process?
Once a borrower gets a release from the loan, he needs to pay the deed tax on account of the deed-in-lieu. In this process, if the lender cancels the debt, the deed tax is calculated on the basis of the unpaid loan amount along with any accrued interest which is forgiven. However, if the borrower goes for a deed-in-lieu and pays a certain amount towards the unpaid debt, the extra cash serves to reduce the amount of unpaid debt which is the basis of the deed tax.

It may happen, that the lender pays the borrower a certain sum of money in return for the deed-in-lieu when there is some equity in the property. In such a case, the cash offered to the borrower is added to the unpaid debt in order to determine the basis of the deed tax.

A deed-in-lieu may have a negative affect on a borrower’s credit report thereby lowering his score. Even then, it has certain advantages both for the borrower and for the lender. Most often, the borrower gets the chance to free himself from the indebtedness associated with the loan. And, at the same time, he can avoid foreclosure which has greater negative impact compared to a deed-in-lieu. The lender, on the other hand, can avoid spending his time and money in completing the foreclosure.