Many homeowners today have determined that they can no longer afford their mortgage and remain in their homes. They are faced with the possibility of losing their home in foreclosure and the credit problems associated with foreclosure. These homeowners have other options, but to decide which option is best for them they need to compare the options of deed in lieu of foreclosure vs short sale. To make that comparison it is important to know the meaning and benefits or consequences of each.
Short sales are real estate sales in which the seller’s lender must give approval for the sale and ultimately accept the potential buyer’s offer. The lender must agree to this because they are agreeing to accept an amount of money for repayment of the seller’s property that is less than the seller owes for the property. This reduced payment of the mortgage balance leaves a remaining balance known as a deficiency. The lender can choose to pursue the seller for repayment of any deficiency or they can forgive the deficiency.
A deed in lieu of foreclosure is real estate transaction in which there is no buyer. The lender stops foreclosure proceedings, which are already in progress or agrees not to begin foreclosure proceedings when the homeowner gives the deed to their property to their lender. Now the property owner, the lender can sell the property. When the property sells the sale amount obtained is applied against the former homeowner’s mortgage balance. There is often a deficiency in these cases. Just like the deficiency of short sales, this deficiency may be pursued or forgiven.
There are many similarities in the comparison of deed in lieu of foreclosure vs short sale. One of the similarities is that the former homeowner needs to get a written agreement from their lender to be free from the possibility of the lender pursuing a deficiency judgment against them in either of these options. Both of these options are less damaging to the former homeowner’s credit than losing a home in foreclosure. If there are additional liens on the property, they may cause either of these options to fall apart. In either case, any secondary lien holders must also give their approval before the homeowner can take advantage of the opportunity to prevent foreclosure. Secondary lien holders are disinclined to approve these options because they have nothing, or very little, to gain from them.
When comparing deed in lieu of foreclosure vs short sale, some differences may be found just as are some similarities. These differences are primarily caused by the fact that the deed in lieu of foreclosure is not a sale and short sales are.
During short sales, the seller must often have an actual purchase offer by a potential buyer prior to learning whether their lender will approve them for short sale. Finding a potential buyer can be difficult in today’s economy, having the lender reject their offer can cost a great deal of time the seller cannot afford to waste. If the seller is unable to find a buyer or get an offer their lender may accept, the lender has the option of beginning foreclosure proceedings.
Short sales can also create a problem with the seller’s income tax return. The seller may have to report the deficiency amount as part of their taxable income if the lender forgives the deficiency. Sellers, in addition to having to pay taxes on the deficiency as if it were actual earnings from an employer, may even end up in a higher tax bracket and therefore owe more tax money to the IRS. Some exemptions are provided for some sellers by the Mortgage Forgiveness Debt Relief Act of 2007.
Lenders are unlikely to accept the deed in lieu of foreclosure option before the homeowner has had their property listed for approximately three months in the market. Lenders are in the business of lending money, not selling homes, and therefore do not always want to accept this option and have to do the work of selling the property themselves.
When comparing deed in lieu of foreclosure vs short sale, each homeowner must decide for themselves which is the best option. In some cases it may merely be situational. If the homeowner has already been rejected for loan modification to be able to remain in the home, they may progress to short sale. When short sale does not work out, the homeowner may then attempt deed in lieu of foreclosure to prevent the ultimate calamity of losing their home in foreclosure.