Mortgage Messes: Should You Clean Up with a Foreclosure, Short Sale or Deed in Lieu?

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Most people who are in pre-foreclosure believe that this is the only option they have. If you’re facing financial troubles, can’t pay your mortgage, and feel like there’s no way out, you might be surprised to learn that you have two options to foreclosure that could keep you out of serious trouble.

A Deed In Lieu Of Foreclosure

With a Deed In Lieu of Foreclosure, you willingly agree to give up the deed to your home to the lender. Usually, this happens if you aren’t able to sell the house. However, you can request this right away if you don’t think a sale is possible for some reason.

You must fill out an application and submit it along with some documentation about your income and your expenses. Specifically, you must submit a financial statement that provides very detailed information about how much you make every month, what you spend, your proof of income, your most recent tax returns, your bank statements, and a hardship letter.

If you are approved for a Deed In Lieu of Foreclosure, you’ll get a deed that transfers ownership of your home to the bank, and an estoppel affidavit. This means that you cannot come after the bank later for taking your home.

A Short Sale

A short sale is a sale in which you sell your home for less than the amount you owe on the mortgage. You must have a bank’s approval for this, and it must be in writing. Furthermore, the bank will sometimes want to do a cooperative short sale.

This means that they pay you to stay in the home and take care of it until it’s sold. Find a CDPE in NJ that can help you with this arrangement. It’s usually a good deal for the homeowner, and the bank can even extend a cash incentive for relocation (moving).

Short sales also require an application with a detailed financial statement, proof of income, bank statement, most recent tax returns, and a hardship letter. The bank also sets the purchase offer and may help set the listing offer.

Finally, banks can ask for a deficiency judgment to recover any remaining amount on the mortgage. A deficiency judgment means that you are responsible for the remainder of the balance on your mortgage after the short sale.

Sometimes, the bank will have you sign a promissory note – an unsecured loan – for this balance. This will mitigate the damage to your credit, since you’re actually repaying the loan.

What’s Best For You?

Choosing the right foreclosure alternative can be tough. The best decision ultimately depends on your specific financial situation and what you want in terms of an outcome.

A Deed In Lieu of Foreclosure is a bit more damaging to your credit, since you’re admitting that you cannot afford the loan. The bank must write off the entire balance of the mortgage and then report that loss to the IRS.

Not only will your credit be damaged, you’ll end up with a 1099 for the forgiven loan amount – you’ll have to pay income taxes on the debt. A short sale can be complicated though.

Choose a short sale when you have access to a lawyer and a real estate agent that specializes in these types of transactions. Expect the process to take up to 6 months to complete. You’ll also have to work hard with an agent to sell the house. You may still end up with damaged credit, depending on how the deal is arranged (i.e. deficiency vs non-deficiency judgment).

Short sales tend to be better, overall, for most homeowners though, since the deficiency is usually less than if the bank has to take a total loss.

Lisa Anders is a real estate consultant who has helped many people keep their homes. A researcher and writer, she shares her sage advice on a variety of websites. Look for her tips and pointers on real estate and mortgage blogs on the web.

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