What’s the Difference Between Short Sale and Deed in Lieu of Foreclosure?

If you are having difficulty making your mortgage payments, talk to your lender as soon

If you are having trouble affording your home in difficult economic times, you might be able to avoid foreclosure by either a short sale of a deed-in- lieu of foreclosure. Although neither option is as appealing as staying in your home during hard economic times, they can help you avoid foreclosure’s costs and hassles.

What is a short-sale?

A short sale is when your home is sold for less than what you owe on your mortgage. Your lender does not have to approve the sale, but it does not have to be to them. This option is for borrowers who cannot afford to make their monthly mortgage payments or cannot pay the difference between the sale price of the mortgage amount and the purchase price. The lender must agree to release the borrower from the obligation to repay the mortgage balance. Before allowing a short sale, many lenders require that borrowers who are financially or economically challenged show proof of hardship.

  • Advantages of a short sale:
    • You no longer need a mortgage payment.
    • You can buy another house in two years instead of five to seven years after you foreclose.
    • You can save the fees and costs associated with foreclosure.
  • Disadvantages of a short sale:
    • If your lender reports a short sale to credit monitoring agencies, it could cause credit reporting problems.
    • If you owe money more than one creditor (for instance, if you have taken out second or third mortgages on your home), they will have to agree to the short-sale because they too will be paid a lesser amount than you owe.

What is a deed instead of foreclosure?

A Deed in Place of Foreclosure transfers ownership of your home and pays off your loan. This will avoid foreclosure. Before an ownership transfer can be made, the lender and the borrower must agree to a settlement agreement that includes a sale price at least equal the fair market value of the home. The borrower must also agree to the settlement agreement. He may be required by law to provide written proof that he is doing so.

  • Advantages of a deed in lieu of foreclosure:
    • It fulfills all of your loan obligations.
    • A foreclosure does not cause credit damage as severe.

However, there are issues when more than one lien holder is on the property. If your lender purchases your home as a deed-in-lieu of foreclosure, it will assume responsibility for any outstanding judgments or unpaid mortgages. In these cases, your lender might want to foreclose your home to get rid of these liens.

Deed for lease or mortgage to lease

An alternative to foreclosure is “deed to lease” or “mortgage-to-leave.” Fannie Mae introduced this rent-back program in 2009; banks are now trying to implement their programs.

The rent-back plan is tied to the deed instead of foreclosure program. The lender would have to agree that the defaulting borrower could stay in the home for up to three years as a renter. This program is not open to everyone, as it would be at lender’s discretion.

Bottom line

If you are having difficulty making your mortgage payments, talk to your lender immediately. This could save you the trouble, time, and hardship of going through the entire foreclosure process.

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