Deed in Lieu or Short Sale?

Real Estate Agent with Whipple Auction & Realty, Inc.

When trying to avoid an imminent foreclosure, the borrowers should be aware of their options.  I have found that currently there are two options to eliminate the loan, short sale or deed in lieu of foreclosure.  The difference between the two really depends on the current market value of the home and the remaining amount owed on the mortgage note. 

A deed in lieu, as we call them, is a deed instrument that allows the borrower to sign over the deed to the property to the bank to satisfy a loan in default.  Most likely, a bank will only agree to a deed in lieu if the amount owed is less or equal to the value of the real property. This may be different now that the market has decreased, so anyone will want to consult a professional on deeds in their market. 

A short sale is an agreement between the bank and the borrower to sell the property for less than what is owed.  The borrower will have to be in financial hardship for the bank to agree to discount the loan.  Short sales do affect the borrowers credit somewhat, but not as bad as a foreclosure.  A short sale is seen as a type of settlement.

One thing to note is that every bank is different. One bank held my short sale sellers responsible for the remainder of the debt, which was a considerable amount of money and we got lucky to find a buyer willing to pay the asking price.  Other banks will eliminate the debt.  You may want to know your note holder's policies on short sales.

There are other options if the loan payment amount is just out of reach but you wish to stay in your home, such as loan modification, special forebearance, refinance, etc.  Talk with your bank's loss mitigation deptartment (if you can get through), and see what options are available.

One possible scenario in the future is government interference. I really don't see this happening, but I also didn't see the fed buying $600 billion worth of mortgage-backed securities.


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