Should I consider a Deed in Lieu, Short Sale or just go the Foreclosure route in Colorado?

Real Estate Agent with The Edge Group LLC 1298065

Deed in Lieu:

A deed in lieu of foreclosure is where you deed your property to the lender in exchange for being forgiven the entire amount of the mortgage. The lender then sells off the property in order to retrieve as much of the unpaid mortgage amount as they can. In my Real Estate career I have only seen a Deed in Lieu accepted by a Mortgage company as Colorado is deficiency state. The transaction was with an estate sale so I understand why the mortgage company did the Deed in Lieu as the deceased person didn't have any assets or future income to go after.

What Is A Deficiency Judgment?

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or non-recourse loan.


The fuller, statutory definition as defined by New York is: "the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.


The plaintiff's attorney (in other words, the bank's lawyer) must make a motion to receive such a deficiency judgment. Otherwise, the amount gained from the sale shall be deemed the full amount owed, and the plaintiff has no right to collect the additional debt. However, if the parties (mortgagor and mortgagee) have already agreed in their mortgage or promissory note, then the debtor could be liable for the full amount.


A debtor who has a deficiency judgment should see an attorney for possible remedies, including bankruptcy, an exemption from creditors, an appeal, or a motion. As with all legal research sources on-line, Internet users should take caution before applying such advice to your own case, and perhaps should consult an attorney.


Example: Upon Default by the Mortgagor a lender forecloses on the mortgage. The unpaid balance of the loan is $102,000. The property is sold at public Auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortage, plus foreclosure expenses.


Deficiency States


Legislation enacted during the Depression still restricts the availability of deficiency judgments in several states. In some jurisdictions, deficiency judgments are prescribed in certain situations, while in other states, they are limited to the amount by which the debt exceeds the fair market value of the property. Waiver, the intentional relinquishment of a known right, of the benefits conferred by anti-deficiency legislation contravenes public policy and is ineffective.

In non-deficiency states like Arizona a lender is unable to pursue any type of a deficiency judgment. Concerning foreclosures non-deficiency states are advantageous to owners in foreclosure because the lender is unable to pursue the deficiency judgment.


What is a Short Sale?


A short sale is the process by which a homeowner can sell a house for less money than actually owed on the mortgage(s).

There are alternatives to bankruptcy or foreclosure proceedings for homeowners/borrowers who can no longer afford to keep mortgage payments current. One of those options is called a "short sale." Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by allowing a homeowner to sell (allowing a buyer to purchase) the home for less than the mortgage balance while the home is in pre-foreclosure stage.

In 90% of my short sale cases I have been able to get the mortgage company to accept the short sale and not go after a deficiency after the sale is complete.

Sample steps of a short sale:

•Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.

•The owner, or if the owner has an agent, finds a buyer who makes an offer for less than the amount of the mortgage.

•Seller accepts the buyer's purchase offer subject to the lender's approval.

•Seller's lender accepts the buyer's purchase offer.

•Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.

The decline in market value of a property below the total debt owed on that property does not automatically qualify a homeowner for a short sale. Banks take several factors into consideration when determining if it will allow for a short sale to occur.

Qualifications for a Short Sale

• The Home's Market Value Has Dropped. Comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.

• The Mortgage is in or Near Default Status. It used to be that lenders would not consider a short sale if the payments were current, but in many cases, lenders realize that other factors contribute to a potential default making them eager to head off future problems.

• The Homeowner Has Fallen on Hard Times. The homeowner must submit a letter of hardship that explains why they cannot pay the difference due upon sale, including why the homeowner has or will stop making the monthly payments.

Examples of hardship are:

􀂃 Unemployment

􀂃 Divorce

􀂃 Medical emergency/sudden illness

􀂃 Bankruptcy

􀂃 Death

􀂃 Other unforeseen circumstances that caused financial


• The Homeowner Has No Assets. The lender will probably want to see a copy of the owner's tax returns and/or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the homeowner has the ability to pay the shorted difference.

Homeowners with assets may still be granted a short sale but could be required to pay back the shortfall.

Short Sale Consequences

A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale.

It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.

• Tax Consequences. If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

• Blemished Credit Report. A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as bad as a foreclosure to you, creditors may not make the distinction.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.



There are a number of concerns in the case of homeowners allowing their homes to go into foreclosure because they cannot afford them anymore, and what the consequences will be for such a decision. Before choosing to let a house go into foreclosure, though, every homeowner should look into a few other options to stop foreclosure first. While foreclosure refinancing is the option that most homeowners attempt first, credit and income considerations and tighter lending guidelines have precluded most homeowners from qualifying for a loan right now. This makes it necessary for homeowners to gain more broad foreclosure advice and look at other methods to save their home before willingly allowing it to go into foreclosure.

Regardless of the homeowners' financial situation and the current real estate market, the house should be listed on the market just on the off-chance than an interested buyer wants to purchase it before the foreclosure goes through. Selling to avoid foreclosure is always a better option than foreclosure. Foreclosure victims can also try to work with the lender for a short sale, where they would sell the property for less than what they owe on the loan, including all of the miscellaneous foreclosure costs and accelerated interest. With this option, at least the short sale will pay off the loan and save the homeowners' credit more than having a foreclosure show on their report.


Paul Gruber


The Edge Group Inc.

Direct: 303-886-5991

Fax: 1-888-847-9118


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Jason M. Keith
Caliber Home Loans - Parker, CO
Equal Housing Lender

Very good explanation Paul, trying to educate people in a difficult time certainly helps them make a better decision.

Feb 22, 2011 04:59 AM #1
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