Foreclosure Alternatives: Short Sales and Deeds in Lieu

If you’ve been denied a loan modification and can’t afford to pay your mortgage, you still have a couple of options. To avoid foreclosure, consider a Short Sale or a Deed in Lieu of foreclosure.

These options allow you to sell or walk away from your home without incurring liability for the loan deficiency.

Short Sale

In a Short Sale, your lender agrees to let you list your home and accept an offer that is less than your loan and sometimes less than current market values.

Pros of a Short Sale? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won’t suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

Cons of a Short Sale? You’ve got to have a documented offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won’t know in advance what the lender is willing to settle for.

Be aware that a short sale may generate taxable income based on the amount the sale proceeds.

If you’re unsure about the tax issues, contact your Accountant and ask how selling your home by Short Sale will affect your taxes.

Deed in Lieu of Foreclosure

With a Deed in Lieu of foreclosure, you hand over your deed in exchange of the cancellation of your mortgage debt. If your lender agrees, in writing, this will prevent them from starting or continuing foreclosure proceedings.

Before the lender will accept a Deed in Lieu of foreclosure, they might request that you explore the Short Sale option. Most lenders prefer that you sell the house rather than add it to their existing inventory of foreclosed homes. Most lenders would prefer cash rather than another deed.

Pros of deed in lieu? Many believe that a Deed in Lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. And, unlike in the short sale situation, you might not need take responsibility for selling your house. Your lender would be responsible for the sale of your property.

Cons of deed in lieu? There are several cons to a Deed in Lieu. As with Short Sales, you will have difficulty completing a Deed in Lieu if you have second or third mortgages, home equity loans, or liens against your property. And Beware of tax consequences. As with Short Sales, a Deed in Lieu may generate taxable income based on the amount of your unpaid loan.

How Long Does a Deed in Lieu Stay on Your Credit Report?

A Deed in Lieu of foreclosure can appear on your credit report for up to 7 years. And it’s only slightly favored above foreclosure status because you didn’t go through the entire foreclosure process.

My advice? Start with a Short Sale. The effects of a Short Sale aren’t as long-lasting as a Deed in Lieu or a Foreclosure.

As an LA County Short Sale Specialist, I can help explore all of your options.

Sincerely,

Mark Shandrow
Real Estate Broker / Short Sale Specialist
Shandrow Group
shandrowgroup.com

P.S. Don’t forget to sign up for my list to get more Short Sale information, or click the Short Sale button on the right.