Short Sale vs. Deed-in-Lieu

by Jeff on November 20, 2009

Short Sale vs. Deed-in-Lieu of Foreclosure: What’s Your Best Choice?

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. Like most alternatives, both have their upsides and downsides. Understanding these options is the only way to make a truly informed decision.

Short Sale – lender takes the loss

When deciding 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 they accept, is permitting you to sell your home for less than you owe and taking the loss. If the bank does go along with the short sale, it will relieve you of the debt burden (arrearages) as well as the cost, emotional strain and embarrassment of a foreclosure procedure.

On the upside, a short sale is far less destructive to your credit rating than a foreclosure, as it is listed as a “settled debt” on your credit report. However, it is still harmful to your credit score and can reduce it by 100 points or more.

On the downside, the lender may go after you to collect the difference between the short sale price and what you owed him by getting a deficiency judgment. More often than not this doesn’t happen simply because there is no money to recover.

Deed-in-Lieu of Foreclosure – walking away from the house

A deed-in-lieu of foreclosure is when you give your home back to the lender, take your losses, and prevent the foreclosure. Lenders will frequently accept this because it is a less expensive and time consuming process than a full foreclosure. The upside is that a deed-in- lieu is sometimes a faster solution than a short sale. The ramifications to your credit score are about the same as the short sale.

On the downside, when the lender eventually sells the home for a price that doesn’t pay off the original mortgage amount they can seek a deficiency judgment and try to collect. Another downside to deed-in-lieu of foreclosure is the lender takes control of the property immediately vs  short sale allowing the homeowner to retain the property while listing.  The downfall comes from time healing all wounds, if you are able to cure the problem while listing your home short sale stepping back into the property is allowed.  Once a homeowner has signed the deed –in-lieu of foreclosure all rights to the property are passed to the bank.

Foreclosure – lender takes the house through court action

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 accumulated. The bank will hold you financially responsible for 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 all cases avoiding foreclosure is always the best choice.

How is a Short Sale / Foreclosure Seller’s Credit Affected?

Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale
Experts agree that the effect of a short sale (providing the sellers are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 or more points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420.

Across metro Atlanta home owners are experiencing varying results.  One seller who was 90 days behind on her mortgage negotiated a short sale with the bank. A few months after the short sale closed, she checked her credit report and found her FICO fell by only 100 points to 671. A home owners best protection against credit problems requires the timely monthly payments of mortgage notes, if unable to pay experts agree a short sale might be your best option.

Waiting Period Before Buying Another Home

Foreclosure or Deed-in-Lieu of Foreclosure
It is possible for a seller who wants to buy another home after foreclosure to wait about 24 to 72 months before a lender will offer any kind of interest rate that makes sense.

Short Sale
Some lenders say the good news for short sale sellers is the wait is much shorter before buying another home. Fannie Mae guidelines now require only 24 months’ seasoning, and that’s good news for seller going through a short sale.  Experts says, “The good news is a short sale will allow the consumer to obtain an institutional loan for a new home within two years”.

Note that Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current, had no delinquencies exceeding 30 days and did not agree to repay the debt relief. It’s the late payments that affect your credit report, not the short sale.

If you are experiencing harassing calls from the bank and foreclosure appears imminent, now is the time to call JeffBarnwell@remax.net  By listing your house as short sale most banks are willing to wait a reasonable time allowing  the property a chance to sell.  Call today and speak with an expert on short sale / deed-in-lieu of foreclosure transactions, 770-990-0743.

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