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BenShort Sale vs. Deed-in-Lieu: What’s Your Best Choice?
Homeowners facing foreclosure often have the option of selecting a short sale or a deed-in-lieu of foreclosure as a possible solution to their financial difficulties. But are they? Which is the best choice? Like most alternatives, both have their upsides and their downsides. Understanding these options is the only way to make a truly informed decision.
In a short sale, your lender takes the loss
When you decide to use a short sale to prevent foreclosure, you should understand that the sale must have the lender’s approval and that lenders don’t always agree. What the lender is doing when he accepts, is permitting you to sell your home for less than you owe him and taking the loss himself. If he does go along with the short sale, it will relieve you of the burden (arrearages) as well as the cost, emotional strain and embarrassment of a messy foreclosure procedure. On the upside, a short sale is far less destructive to your credit rating than a foreclosure, 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 200 points or more.
On the downside, the lender could always go after you to collect the difference between the short sale price and what you owed him by getting a deficiency judgment against you. However, more often than not, 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.
deed-in-lieu may be your fastest way out
A deed-in-lieu of foreclosure is when you give your home back to your lender, take your losses and thereby prevent the foreclosure. Lenders will frequently accept this because it is a less expensive and time consuming process for him than a full foreclosure action. The upside is that 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.
On the downside, 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 and try to collect it from you. Once again, however, he knows that you can’t get blood out of a stone and probably won’t proceed if there doesn’t appear to be any money to recover.
Select either Short Sale or Deed-in-Lieu as early on as possible
The sooner you act on either a short sale or a deed-in-lieu the better. Once the foreclosure process is activated, you will not be in a strong position to negotiate with your lender because payment arrearages, interest and penalties have piled up. He can hold you financially responsible for his losses and seek a deficiency judgment that will appear on your credit report even if you don’t have the money to pay it. In either case, however, avoiding foreclosure is always a better choice in terms of the effect on your credit.
I successfully short sold my home. It was an easy process, but it beat having my home go to auction at foreclosure! Check out my guide to short selling a home before you do anything else!
Need an experienced Agent?
From my blog here I’ve developed a pretty extensive network of real estate agents that have short sale experience. If you’d like a referral, fill out the form below and I’ll get back to you in a day or two with a agent who can help with your short sale (don’t just go with any agent to short sell your home!)
~DebtKid
I'm 300K in debt. Gulp. I'm 24 and day traded away a fortune. Now I'm trying to crawl back to zero. Why not subscribe to my RSS feed and join me on this journey. You can also subscribe via e-mail. I appreciate tips and feedback! ~ DebtKid
on January 21st, 2008 at 5:24 pm
Thank you for all of this information. It has helped me sort out all of the “advice” I’ve received from well intentioned family and friends and many of those in the real estate profession. I am an Escrow Officer and am familiar with short sales, foreclosures, etc. but what no one could confirm for me…and you did, was the difference in the impact of short sale vs. deed in lieu of and the fact that HR 3648 also applies to debt forgiven as a result of short sale as well as foreclosure…..thanks!
on February 28th, 2008 at 8:39 am
Here is my situation:
I lived in a small, one company town that didn’t have a bright future. So, I moved cross country. The house has been for sale since July of 07. No offers and we’ve reduced the price to about what we owe on it, ~$450,000. Given the future of the company in this one company town, I don’t see this house selling for a year or so. I can’t wait that long.
I’m buying a new house on 3/29 while my credit is good. My credit score is 811 right now.
From talking to others, a deed-in-lieu seems to make sense. Just give the house back and move on. How long does this process take? Can it be completed in a few weeks? When should I contact the lender? I don’t want to do anything that would effect my credit before 3/29.
Thanks,
-d
on March 5th, 2008 at 6:04 pm
Dear Debt Kid:
My wife and I have to move this summer. We bought our house, with 100% financing, for $265,000. It is now on the market for $185,000. We have an offer and are now trying to get a short sale approved, with the help of the real estate agent. This agent told us that our lender would not ask for bank statements or tax returns. The lender is now asking for both. The statement and tax returns show that we in fact can afford to pay our mortgage, which we have not paid for a couple of months. We were told that this was a requirement for them to take our short sale request seriously. Since they will likely not approve a short sale, is our best option a deed-in-lieu? Will they approve it and what will happen? We really can’t handle being stuck with $80,000 in debt. We would be grateful for any advice. Thank you for this site!
on March 6th, 2008 at 9:33 am
Short sales require a Hardship letter. All of the short sales I have encountered in Real Estate sales were for people who truly need the help. Some have lost their job. They are going through a divorce. Even a military transfer. Some have taken a cut in pay to keep their job. The short sale program is not for people to abuse it. After reading the above letters - they seem like people who would abuse the welfare system and live off of it rather than use it temporarily to better themselves so they will no longer need the assistance. The banks are taking the hit. With people out there like this there will be few banks due to several closing their doors. (This is all ready happening) or the costs of banking will eventually increase and we all pay for it. I suggest you keep your homes - because you financially can. Your lender did not put you in a home where you could not afford to go to dinner on Friday night. Your home is an investment. The stock market goes up and down and now the the housing market has gone down. There were no guarantees. Take your loss or don’t sell. Rent your home out until the market gets better. You can’t get the same money you lost in the market back. You can’t go gambling, lose and expect not to pay. Remember - take advantage of a situation like this and Karma may come back to you and place you in the same situation your pretending to be in. This time with no help available. Do the Right Thing!
on March 9th, 2008 at 8:39 pm
Jennifer: Just b/c we can afford to pay mortgage does not mean we can afford to pay off $80,000 in debt and pay rent for a new home at the same time. This might not be “hardship” to you, but it is to us. We can’t stay (have to move, remember) and we can’t rent it out in this market. We didn’t “gamble”, we bought a home. Stop whining.
on March 13th, 2008 at 3:55 pm
I am glad to have google this same title…… The information in here was valuable.. I knew some things but not all . And still have more questions than I care to ask here.
I will definitely continue reading the posts
on March 27th, 2008 at 2:05 pm
David…
Just wanted to say you’re not alone - I purchased a property in ‘05 that’s way upside-down now, then met my wife, got married and now live in her home. I don’t need my original property now (renting it can’t cover the extremely high mortgage). Although I make a good income, I cannot afford this mortgage and the one on my wife’s home (wife has no income). This is certainly hardship…and I’m now forging ahead with trying to do a short sale. I’m wondering if my lender will even take me seriously given my situation, even with the hardship letter. Do I just stop making payments? It’s all pretty scary so anyone feel free to weigh in…Thanks!
on April 17th, 2008 at 6:52 am
I’m with you also. We bought in 05 in Fl and I have recently taken a job up north. We need to sell but will end up short about 40K plus fee’s. I don’t want to ruin my credit score but don’t know which way to go. We stuggle to make the 2K mortgage and then insurance and taxes on top of that. Any suggestions would be helpful.
Good website. Well done!
on April 25th, 2008 at 6:33 am
Jennifer sounds like a banker. Read Woodrow Wilsons relent about the banking industry after he organized the Federal Reserve for a bit about the banking industry. Anyhow, as for her comment “Your lender did not put you in a home where you could not afford to go to dinner on Friday night,” this is absolute crap. M&I bank gave me a $900,000.00 loan, yes that’s right, almost a milklion dollars, on property that has lost all of it’s value and now they want tp punish ME! If you have never been in financial crisis like this one, you will never quite understand just how much of our lives banks control. They do risky and stupid things because afterall, they are insured by our tax dollars. They deserve to close their doors if they have practised bad lending habits. Banks can go to hell for all I care.
on April 25th, 2008 at 1:20 pm
I did a short sale on a condo I purchased as an investment in ‘05. This was a condo conversion all of us idiots stood in line from the night before to buy one. A couple a year later I decided to put mine up for sale after loosing my tenant and was in for a rude awakening. My lender at the time, Homebanc did not want me to do a short sale so I had to stop making payments so they would take me seriously. I got an all cash offer from a buyer for 110K in Sept 07 and Homebanc would not accept the offer. I couldn’t belive it even with all of the other condos on the market . Finally after my realtor convinced them to do a secondo appraisal they made the buyer come up 3K and accepted the short sale offer. As far as my credit goes I had perfect credit before the short sale my mid score was a 750. After the deal was closed about a month and a half later a different lender contacted me about payments on the property, I had to prove to them at least a half dozen of times that I no longer owned the property and they were sold the mortgage during an acuistion period. UNBELIVEABLE I thought I finally got rid of this headache and here I am defending myself to a completely different lender that I no longer own the property. THey finally stopped harassing me and a few weeks later a different lender started…YES again they sold the loan and I did not even own the property. Well this happened again for the third time and finally at the end of January this year 2008 they sent me a letter of satisfaction. So, back to my credit I am not sure if it slipped through the cracks becasue of all the after market selling of my loans or if I just plain got lucky but I have 3 lates total from Homebanc and my score is back up in the 700’s. This was a very stressful time, however I recomend doing a short sale whenever possible. It can save your credit in the long run. Also, in my opinion if the lender tells you to wait to drop the price..DON’T LISTEN especially in this market…drop it now because you are going to take a loss either way. It’s better to place the home on the market with a competitive price then to waste your time marketing it at a price that will give you no action on the property. GOOD LUCK…remember you are in the same boat as a lot of people and this will all eventually pass. I truly believe when the market does recover later down the road there will be a HUGE wave of people who all have either mort lates, shrot sales, deed in lieus which negatively affect their credit…and because of this there will come a time when lenders will again have a loan product out there for us who fall in this boat so we again will be able to buy. Afterall lenders created the market we are now suffereing from and they will have to forgive our debt because of their inability to see what type of bubble they created.