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Is a Lender More Likely to Accept a Deed in Lieu of Foreclosure, or Short Sale for Your Sarasota, Bradenton, Venice, Lakewood Ranch Florida Home?
Both a "deed-in-lieu-of-foreclosure" and "short sale" are alternatives to foreclosure that may, or may not be available/acceptable to the parties involved, depending on their particular circumstances.
Let's start with definitions . . .
A "foreclosure" occurs when a lender exercises its rights against a borrower to take ownership of a property that was pledged as collateral (mortgaged) for a debt. In Florida, a foreclosure is always a formal judicial process (must occur as a result of a court order) instituted by a lender who has ceased receiving payments from the borrower. Certain legal and procedural formalities must be followed if there is to be a valid and binding foreclosure.
A "deed-in-lieu-of-foreclosure" (a deed "instead of" foreclosure) occurs when a borrower who is unable to continue making mortgage payments voluntarily hands the deed to their property over to their lender in exchange for the lender agreeing not to pursue a formal foreclosure.
A borrower might prefer a "deed in lieu" because it allows them to avoid the negative impact to their credit rating that a foreclosure brings, and under certain conditions a lender might find that they come out better financially if they accept the deed rather than foreclose on the property (more about the conditions under which a mortgage lender might accept a deed-in-lieu later). Take note of the fact that a deed-in-lieu is a voluntary settlement between the parties and neither party is obligated to pursue/accept a deed-in-lieu.
A "short sale" occurs when a lender(s) agrees to release its lien(s) on a property in order to allow a sale to go through, even though the sale price comes up "short" of paying off the existing mortgage balance(s). If there is more than one mortgage in place, then all lenders must approve the short sale in order for it to occur (Note: In a short sale situation only the 1st mortgage lender receives any proceeds from the sale -- the 2nd mortgage lender gets nothing. For this reason, the 2nd lender typically will agree to a short sale in exchange for a very small payoff, usually paid by the 1st lender).
Again, a borrower might prefer a "short sale" because they avoid the negative impact to their credit rating that a foreclosure brings, and a lender might find that they come out better financially if they approve a short sale rather than foreclose on the property. A short sale is a voluntary settlement between the parties and neither party is obligated to pursue/accept a short sale.
So, is a lender more likely to accept a deed-in-lieu, or short sale?
While from the homeowner's point of view both of these foreclosure avoidance options are superior to a foreclosure, such is not always the case from the lender's viewpoint. The lender has to consider the expense, liability, time-line and existing current market conditions when determining whether or not to accept either a deed-in-lieu or short sale over a foreclosure.
In declining market conditions like those being experienced in Florida today, a lender is highly unlikely to accept a deed in lieu of foreclosure...
If you think about it from the lender's point of view, this makes perfect sense. Realize that bankers are not in the business of owning rental houses. By whatever method a lender takes possession of a property, they are not going to keep it -- they are going to hire a real estate agent to sell it, so that they can recoup as much of their funds as possible. Furthermore, the moment a lender takes the deed they become completely responsible for the maintenance, taxes, insurance, etc. for the property.
You see, in rising market conditions a lender is more than likely to accept a deed in lieu, because the increasing market values will allow them to defray and recoup holding costs, and perhaps even come out with a bit of profit for their troubles. But in declining market conditions like those being experienced in Florida today, the property values are decreasing, so the lender is likely to come out with even less money than if they were simply to allow you to short sell the property and be done with it.
In declining market conditions like those being experienced in Florida today, a lender is highly likely to prefer a short sale over a deed in lieu...
From the bank's perspective, a short sale makes more sense than a deed-in-lieu in a declining market, because it's faster (the property looses less value, meaning they can recoup more of their funds) and because they don't have to fund the operating expenses (maintenance, taxes, insurance, etc.) of the property until after it sells (NOTE: With a short sale the lender still pays all of the closing costs, back taxes, etc., but this is "after the fact," rather then having to pay all of those costs up front, as would be the case if they actually took ownership of the property).
As far as the homeowner is concerned, a short sale is just fine as compared to allowing the property to go all the way to foreclosure:
1) They avoid the negative impact that a foreclosure has on their credit rating.
2) They are able to stay in their home rent-free throughout the short sale process.
3) They are able to qualify for a new mortgage in as little as 24-months after a short sale, as compared to as many as 7+ years after foreclosure.
The list of benefits of short sales to homeowners is actually quite extensive, but you get the point . . .
In closing, it's important to remember that what we are really discussing here are foreclosure avoidance alternatives. Depending on market conditions, different alternatives may be more appropriate/likely than others, but avoiding foreclosure is most always the superior option as compared to allowing a foreclosure.
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