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    Options for Seller Financial Distress

    Short Sale vs. Deed in Lieu of Foreclosure

    Not having enough money to pay your monthly mortgage is a common issue faced by millions of Americans. If you’re having trouble paying your monthly mortgage on time and your lender has denied a request for a loan modification plan or if the loan modification seems unmanageable, there are a few options to consider prior to foreclosure: a short sale (if the equity is underwater) or a deed in lieu of foreclosure.

    If you can relate to this situation, you may not be not sure which path is right for you. In this article, we will go over the pros and cons of short sales and a deed in lieu of foreclosure.  You can use these as an informal guide when considering your options.  Before finalizing your choice, consult a real estate agent experienced with short sales and distressed properties.  Agents experienced in these areas understand that these sales are about you, the homeowner, more so than they are about the house itself.

    What Is a Short Sale?

    A short sale is when you attempt to sell your house for less than what you owe to the bank. For a short sale to take place, your lender must agree to allow it. There are requirements for the owner to complete a short sale since the lender wants to ensure everything is done to recoup any potential loss.  Typically, homeowners are late on their payments before a lender to consider a short sale.

    Upon the sale of your home, you may or may not owe money to the lender, depending on your situation. Short sales typically occur when property values have gone down significantly in the area, substantially affecting property value.

    The Benefit of a Short Sale

    The benefit of a short sale is that you are provided with an avenue to sell your house and “make good” with the bank. Essentially, the benefit of a short sale for the seller is that they can wash their hands and walk away from the situation.  There is also an opportunity to request a waiver of the deficiency amount.  This means you may not owe

    Does a Short Sale Affect My Credit?

    Yes, a short sale will make a significant impact on your credit score. The higher your score before the short sale, the more significant the drop will be, up to -150 points.  Each credit profile will be impacted differently.

    What Is a Deed In Lieu of Foreclosure?

    We know that foreclosure is not a fun option, so what exactly is a deed in lieu of foreclosure? Technically, a deed in lieu of a foreclosure is a document that transfers the title of the property from you to the bank in exchange for being relieved of your debt.

    When struggling to make monthly payments, a homeowner may request a loan modification from their lender, which is a new agreement at lower monthly payment terms. However, if a loan modification is no longer an option, a deed in lieu of foreclosure might make sense.

    The Benefit of a Deed in Lieu of a Foreclosure

    The main benefit of a deed in lieu of foreclosure is how quickly a homeowner can wash their hands of a property they no longer want or can afford. If approved, the process is quick and efficient, and when it’s over and done.

    Foreclosures can be incredibly time-consuming and costly by nature. The process is also public and out in the open. By contrast, a deed in lieu of foreclosure is a private transaction with your bank and you.

    Reasons You Might Be Rejected for a Deed in Lieu

    If your home has depreciated in value to the point that it is worth less than what you owe to the bank, your lender may only accept a deed in lieu of foreclosure if you can pay the difference.

    If there are liens (HOA, condo, utilities, etc.) or tax judgment on the property, a lender will not agree to a deed in lieu. Also, there are some government-backed loans where the lender is only given a payout if the home goes to foreclosure. In this instance, your lender will not agree to a deed in lieu of foreclosure.

    Reasons Why Your Lender May Be Interested

    Rather than pay legal fees to undertake foreclosure proceedings, your lender might be happy to take control of your property and move on with business. In many cases, your lender will save both time and money by agreeing to a deed in lieu of foreclosure, rather than foreclosing on the property.

    Does a Deed in Lieu of Foreclosure Affect My Credit?

    A deed in lieu of foreclosure will have a negative affect on your credit. You may also owe taxes on your loan forgiveness if it totals more than $600.

    What If I Have Multiple Mortgages?

    It is still possible to partake in a short sale with multiple mortgages. But it is not an option for a deed in lieu of foreclosure.

    Where do I look for help? 

    If you’re in a financial position that you aren’t sure how to manage, there are a couple of places to seek help.  If you’re considering selling your home, talk with a team of agents experienced with helping sellers in distress.  The Teal Clise Group has over a decade of experience in this area.  Please call us at 443-660-8080 or email teal@tealclise.com.

    You can also call the Maryland HOPE hotline at 1-877-462-7555 to find a state-approved nonprofit agency that can provide individual guidance for homeowners facing foreclosure.

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    Teal Clise

    Teal is a 19-year real estate industry veteran with amazing real estate knowledge and a commitment to homeownership for all!

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