The Difference Between Short Sale and Deed In Lieu

Short sales and deeds in lieu are becoming more and more common as the foreclosure rates rise and housing prices fall. It’s a tragic turn of events to be sure but that doesn’t mean we can just pretend it isn’t happening and hope for the best.

You should never decide to do a short sale or deed in lieu without consulting a mortgage professional for objective advice first. This is serious business.

That being said, there is nothing wrong with learning about what options are available outside of foreclosure or refinancing. Short sale and deed in lieu are often confused with each other. To help clear up what each is about, I’ve put together this handy guide.

Short Sale

Say you owe $800,000 to the bank for your house but can’t make the payments. Instead of allowing the bank to foreclose on you, you’ve found a buyer that will give you $700,000 for the house. The bank agrees to this price and takes a $100,000 loss to settle the account. No bank actually wants your house because that means they have to find a buyer themselves, which is a huge hassle. Here is an outline of the process of a short sale.

1. Your lender will verify the value of your property. They
   need to be able to justify why they accepted less than the
   mortgage value.
2. You will need to add up all the costs of selling the property, including transfer taxes, real estate commissions, title fees and closing costs.
3. Then, you need to get the balance of all the loans you owe on the home. This is not just the principal balance but also accrued interest and any unpaid fees.
4. The total of 2) and 3) represent the amount you need to raise from a sale to break even. The amount by which this total exceeds the property valuation is the amount the lender stands to lose if it agrees to a short sale. Obviously, the smaller this number is, the better.

The advantage of a short sale is that it doesn’t affect your credit rating nearly as much as a foreclosure. You will likely lose between 75 and 125 points and a listing of “pre-foreclosure redemption” will appear on your report.

The most important thing you can do while a short sale is going through is to continue to pay your mortgage on time. Missed payments can lower your score dramatically and are an unnecessary blight on your record. A short sale makes the best of a bad situation. As always, it is in your best interest to consult a lawyer, tax accountant and a real estate agent familiar with the short sale process. It may cost you a bit up front but can save you a bundle in the end.

Deed In Lieu

The idea behind deed in lieu is very simple. You just give the deed to the property back to the lender in place of payment. The idea may be simple but that doesn’t mean the process is. While its better than the bank or your lender initiating foreclosure proceedings against you, deed in lieu is not as good as short sale or refinancing.

Because you are transferring the property voluntarily, you will likely receive more generous terms from the lender but your credit will be shot about as badly as it would be for a traditional foreclosure. The process is roughly as follows:

1. Your mortgage company will require your house to be listed with a Real Estate Agent for at least 30 days.
2. There must be no other lien on the property.
3. Some companies may require the property to be vacant a minimum of sixty days prior to a deed in lieu.
4. Generally speaking, a company will not go through with a deed in lieu foreclosure if the amount owed is more than the current fair market value of the property.