Deed In Lieu Of Foreclosure Vs Short Sale

What is the difference between a deed in lieu of foreclosure vs short sale? Both types of transfers are done to avoid foreclosure. Both have both pros and cons and both have tax liabilities. So why would anyone do a short sale or deed in lieu of foreclosure if there are tax consequences and credit problems?

No one plans on losing their home, but today's economy woes have forced many to seek options to avoid foreclosure. Sadly enough thousands are faced with this very dilemma of having to make a decision concerning their future liability. Walking away is not an option as foreclosure lenders may pursue you for the entire amount owed in many states.

What is a deed in lieu of foreclosure? A deed in lieu of foreclosure is a transfer deed back to the lender. The seller simply turns the key over to the lender and walks away owing nothing. This is not as simple as it sounds.  First many lenders will not accept a deed in lieu of foreclosure unless the seller is first behind in payments, a notice of default has been filed and the threat of a possible bankruptcy exists. In other words there has to be reasons for granting a deed in lieu of foreclosure.

An application must be made to apply for a deed in lieu of foreclosure. If both parties agree, there will be papers drawn up and sent to a local escrow company where the seller signs and accepts the terms the lender is offering.  In most cases the seller should negotiate that the lender will not pursue him for further debt and that he may remain in the property until the close of the deal. There are tax consequences except for those who qualify for “Mortgage Debt Forgiveness Tax Relief Act,” that is good up to the end of 2012.

The downside of the deed in lieu of foreclosure is that the owner did not try to settle his debt, but simply walked away. His credit report will indicate that the amount owed on the mortgage was not satisfied, but this is still better than a foreclosure. Compared to a short sale, a deed in lieu of foreclosure looks worse. In a short sale, the seller actually helps the lender recoup part of his money or debt owed. A short sale can only be accomplished with an offer from a viable buyer. If there is no buyer and the home never sells, then the seller should opt for a deed in lieu of foreclosure, if available.

A short sale is where the bank agrees to accept less than what is owed on the property and the seller agrees to move out and leave the home in good shape. The seller must list his property with a reputable agent who understands the process of closing a short sale and a viable offer must be received and processed. The home must be sold at market price or with comparables proving a lower price.

The agent must show properties that have sold in the immediate area during the last three months. Once the offer is accepted, proof of credit reports and a letter from the lender verifying that the buyer will qualify for a loan must be included. The seller must submit proof of income, job loss and a full application stating why he deserves a short sale. Only deserving individuals will get a short sale approval.  It is a time consuming process and is not done quickly as the media states in most cases.

A deed in lieu of foreclosure Vs short sale may bring a quicker result, but it may not be in the best interest of the seller. With both transfers, the seller must qualify for a transfer and prove he has financial difficulty. Banks will more than likely prefer a short sale as having a viable buyer to purchase the property is better than an empty house that needs marketing and sold.