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!
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From my blog here I’ve developed an 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 have someone available in your area to help with your short sale ASAP.
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Has anyone heard of a lender who was willing to negotiating a “paid settlement” or “paid satisfactory” on a credit report in a situation where the borrow was willing to agree to a deed in lieu rather than letting the property to go into foreclosure? I heard this looks better on your credit report.
kz – you have options depending on what state you are in. Lenders are now working with borrowers in your situation and you may also qualify for a government program. Freddie and Fannie will announce their streamlined modification guidelines on December 15. It might be a good idea to consult a real estate attorney regarding your options — they will vary by state.
As far as Jennifer’s comment as to people abusing these systems, these are business transactions between individuals and companies (banks/mortgage lenders). Folks need to drop some of the emotional content associated with this. Of course pride, sense of fair play and all of our individual emotional baggage are at the heart of some of this, but it is best to try and get beyond those. Though there is a segment of the population which was reckless in buying unaffordable homes, flipping houses, etc, as you can see many more individuals/familes are in situations where circumstances have changed and they need to extricate themselves from their current homes. Even in cases where individuals were less than responsible, the current state of the housing market has far more to do with corporate and governmental recklessness than individual recklessness. I’m not about to lose sleep over a bank losing a fraction of the money a family is losing in a short sale or deed in lieu. Use this and other sites to make a cogent, well considered personal business decision.
I LOVE your response Vince! We get way too wrapped up into things we have no control over. It is a personal choice for various reasons and some people are just too prideful, or ashamed to do it even though it is causing them lots of sleepless nights!
Hello All! We as Americans sit today in the drivers seat. These big banks walking arm and arm with our politicians steal from us and rob us. They are now worried that we will walk away from our homes and the loans they sold to investors will be worthless! Yet they still bonus themselves to the tune of millions and have lost mass amounts of money with their hairbrained securitized investment products. Now they have taken tax money and are selling that money back to us at a profit or they keep it for liquidity. I say everyone in this country should apply for a loan mod, or start looking for away to find a home that is at the bottom of pricing, buy it, it will only increace in price (gain for you) and give the bank back your property and let them sell it to the next lucky fellow average Joe at a discount. Then we will all have affordable housing and give the banks (criminals) the finger and hopefully they all kill themselves. Yes I do finance and I gave my 600000 house back, but not before (KEY) I bought a bigger and better house for 310000 with an inground pool in a better neighborhood it sold for almost 710k in 2005!! It is possible! I even save 1800k per month!!
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Will you tell me how you were able to give back your 600000 house to the bank when you have money to buy another house? I am in pre-foreclosure right now since I don’t have any income but I have some savings. I cannot afford to pay the mortgage anymore and used up my savings. I need that money to survive. What do I have to do so the bank will not go after my savings. If they do that I will be living on the street.?
I agree with Nick, except there is one other item to take care of first. Rent out the house you will be walking away from. My house is 70k underwater. I can afford the payments on my fixed 5.5% loan, but it is a financial ball and chain for my future. I’m going to buy a better house for less with my fiance. After that, if I can get a renter to cover the mortgage payment on the old house, then great. If not, I will rent it for whatever I can get, and just stop making payments. It will take nearly a year for the foreclosure, in which time I will save on my payments, and collect rent. My loan is non-recourse, so the bank can’t seize my other assets, or lay claim to my rental income. I won’t need credit cards due to the money saved/collected in this year, and by the time we want to move again, my credit would be rebuilt.
what section of the loan document does it say it is non-recourse?
Who holds your loan Angela? They almost certainly will not come after you. Do you know how many Amrericans would be in court over this!
How would it work if the mortgage due is $55,000 and the house would definitely selll for something like $450,000? Would I get the other $395,000 at sale or is there a better way to set that up. My house is worth more than the mortgages.
Thanks for any feed back from anyone!
Sue
We found our dream home in 7/07, bought, rehabbed and moved in. We put our exisiting home on the market in 7/07 as well. By 9/07 I lost my $90k a year job. The old house sat on the market for a full year until my husband lost his job in 9/08. We finally were able to rent the home to a military family and they moved in 10/08. They just vacated the lease 4/09 and left the house needing $20k in damage repair. We dropped the price of the home since our bank would accept a short sale to the cost of the loan. No one wants to buy and now it’s not even worth showing. We asked the bank today to accept the deed in lieu of forclosure. They will get back to us in the next couple days.
All I can say is that you shouldn’t worry about your credit scores. So many people are in the same situation. My husband is back at work now and his credit union is willing to work with us to refi our mortgage so we can have a more affordable payment. Our scores dropped to 570 and 620 when we had to stop paying our credit card bills in order to make mortgage payments. The credit union went back before our hardship and looked at our old scores and how we never missed any payments on anything. Do what you have to keep your family safe, happy and healthy. Every where I go I hear about people having to let homes go. It’s just the way it is right now. I feel that this is truly a depression and I agree that the politicians and banks put us in this situation. Obama could be president for the next 20 years and he will never fully clean up the mess. Good luck to you all.
A quesion to Nick from his April post. I agree with what you are saying, except what if you don’t have the luxury of securing a home before you let your current one go? We are in that situation right now.
We’ve always been the “good” people…have paid all of our bills on time for the last 19 years, we have good-excellent credit, but the economy has hit us just like everyone else. We bought a house in Idaho 9/06 for $272,000. We currently owe$218,000. Houses are not selling and we can’t afford this $1700/mo payment any more. We’ve exhausted all of our funds (even retirement and children’s savings accounts) to keep everything paid on time. Well, we’ve hit the bottom and cannot afford this mortgage anymore.
We’ve talked to our lender to see if they would do a “Deed in lieu” or “Short Sale”. They are discouraging us or the simple fact that we have a high credit score and we are not yet late on our mortgage payments.
What a catch!
We call to talk to them in hopes they will work with us now (before a foreclosure), but since we are they good guys and aren’t late on payments for 3 months, they would wan’t a “cash donation (to the tune of up to 20k)” at the table in order for them to work with us. How does this make sense? If we had the cash, wouldn’t we be able to afford to stay in our home?
We are at rock bottom but don’t want to screw up our credit. (We still need to be able to get into another house at some point). Does anybody have any great ideas? We don’t want to not pay for three months and have them give us some other excuse at that point that won’t help us anyway.
Best solution for you, I believe, if you like the area, home, and what not is to consider a Loan Mod, and not really worry about your credit at this point. That can be addressed later. I work for a company that has helped many homeowners reduce their payment substantially and stop foreclosure. The other options others have been talking about on here short sales, deed in lieu, and such are other possible solutions, if you don’t need or want the home any longer and remember with those you do run the risk of deficiency judgements.
The lenders rarely does a deed-in-lieu. The best way to get it approved is to do it before the loan goes to foreclosure. It is still subject to investor guideline.
We did a DIL on our home back in 2007. We received notice last week the bank is taking us to court this week for the remaining 22K + attorney fess & interest.
We currently own nothing but our vehicles. There’s no way we can currently payback or even make payments on this balance.
What else will they go after if we own nothing but the vehicles?
Any suggestions on what we need to do before we go to court?
Lisa,
Have you filed a BK?
Please do not talk about banks “losing” money, when a person forecloses, etc. What the bank loses, is a reputation with the “Federal Reserve”, plus interest payments. Banks no longer lend money, they simply negotiate the creation of paper money off the printing presses, based on your credit score. Your signature / credit score, creates the money. The difference is very important. Foreclosure, bankruptcy, etc., do not ruin the economy. What ruins the economy, is the very existence of the Federal Reserve, and its practices of creating new money.
I currently own a home, my first, which is uninhabitable. It just barely passed inspection and a “friend” was going to help me fix it up, had access to builders, craftsmen, etc who were all certified workers to come and help. They gutted my home and never came back. I spent two years with the help of the friend who made the big promises, and much on my own doing the framing, insulating, electric and drywall. Said friend did the plumbing, turns out he was unqualified to do it, and it all has to be removed. The rest of the building is sound, but the home has no kitchen and only a partial bathroom. There are no finished rooms in the house, and I cannot afford to hire someone to do the work to bring the home to a habitable standard. I’m paying $1396 a month for the mortgage and need to get rid of this home. I have a small child and have been staying at a friend’s house, at the cost of about $600 monthly, in order to provide a safe home for my child. I put the house on the market “As Is” for six months and got no offers. I’m being told that the house will need to be put back together in order for anyone to make an offer. There is no way I can fix this house, pay the mortgage, and pay to live elsewhere. My credit is decent, rebuilt after my divorce from a financially irresponsible ex husband, and I hate the idea that I am going to have to destroy it again to get out of this house. Recommendations?
We currently have our house for sale, and I was thinking about lowering the sale price to try to get a short sale. However, in Illinois, the mortgage company can seek a deficiency judgment on a short sale. However, they do not on a deed in lieu… so why lower the price? Anyone have any answers?
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