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Foreclosure Attorney Michael Stites

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Short Sale VS Deed in Lieu of Foreclosure

Learn the differences between a short sale and a deed in lieu of foreclosure.

How do they compare?

Is one better than the other?

Both will negatively affect your credit rating because the loan was “not paid as agreed”, however it is understood that they are the lesser evils of having a foreclosure on your record.

When a homeowner is upside-down on their mortgage and wanting to move, a short sale may be a reasonable option. A short sale is when the mortgage lender agrees to release their lien on a property to allow the homeowner to sell the home for less than what they owe on it. The lender takes all of the money made from the sale of the home in exchange for dropping their lien on the home.

What is a lien?

When a lien is placed on your property will prevent you from being able to sell it or transfer ownership without satisfying the debt that is owed. When you finance a car, the lender will place a lien on the car's title. The lien is what allows the lender to repossess the car if you fail to make payments. The concept is the same when you finance a home. The lender places a lien on the property which prevents you from selling it until you pay them back. The only two ways to remove a lien is to either:

How do I Qualify for a Short Sale?

You may qualify for a short sale if you owe more on your home than what it is worth and you are having serious trouble making your mortgage payments. Although each situation is different, here are the common qualifications for a short sale:

- You have a financial hardship that has affected your ability to make your mortgage payments. This usually is something that is out of the borrowers control including job lost, pay cut, illness, medical emergency, divorce, etc.

- You must sell your home

- You owe more money on your property than what it is worth

A Deed in Lieu of foreclosure occurs when the borrower gives the property to the bank in exchange for the bank canceling the mortgage. A short sale happens when the bank allows the property to be sold for less than what the borrower still owes on it. Typically a buyer will attempt a short sale before seeking a deed in lieu of foreclosure.

Selling a home in a short sale involves convincing the lender to remove their lien on the property for less than what the borrower still owes. For example let us say contractor Johnny Hardluck took out a $200,000 home loan to purchase a house that held a current market value of $220,000.

4 Years Later…

After 4 years of living in the home John manages to pay $40,000 toward the principal of the loan and he now owes the lender $160,000. John's contracting work slows down significantly to where he is barely making his mortgage payments. He finds a job opening in another state that will help him make more money but he will need to move. Problem is, the housing market around him tanked and his home is now only valued at $150,000.

Vanished Equity

This means if the home were to sell for $150,000 John would still owe the bank $10,000 even though he already had paid $40,000 toward the loan. He will need to find a buyer willing to put the time and effort in to negotiating with the bank.

Will I Keep any Money From the Short Sale?

Since the lender is going to take a loss on the loan they gave you,  probably not.

How do I Find out the Least Amount of Money that my Lender will Take for the House?

Usually you cannot. Many banks will require the short sale offer to be submitted before they consider it. One exception to this was the HAFA program which was part of the governments Making Home Affordable Act. Eligible HAFA recipients required the bank to list the amount they were willing the release the home for. Unfortunately, HAFA expired in late 2012.

Do I Get to Keep my Home by Doing a Short Sale?

No. You will need to move because the home is being sold to someone else. (This is actually a common question)

Is a Short Sale Possible when the Home is in Foreclosure?

Yes but time is against you. The bank will be much less willing to approve a short sale if they have already spent time and money on filing a lawsuit against you to foreclose. It would be a good idea to contact a foreclosure attorney. They generally can help prevent your home from being foreclosed on while you locate a buyer for the short sale. According to Wells Fargo their short sale process can take up to 207 days ( which is more than enough time to foreclose on your home.

Should I Continue Making my Mortgage Payments while I am Attempting a Short Sale?

In other words If I’m current on my mortgage loan, can I still do a short sale? This situation can happen when the borrower is seriously struggling to make the monthly payments but still manage to. Perhaps they are dipping into the last of their savings or borrowed money from family, either way, time is running out.

This is a double edged sword situation. If the bank sees that you are current with your payments why would they have any reason to approve a short sale? At the same time, getting behind on payments to get approved for a short sale will quickly make barely manageable debt snow ball into something completely unaffordable. This is where you need to show the lender’s loss mitigation department that you are barely hanging on. This is tough because some lenders won’t even entertain the possibility of a short sale unless the borrower gets behind on loan payments. The danger with this is the homeowner will be putting themselves at risk for the bank foreclosing.

So What Should You Do?

If you can, keep making payments while opening a dialogue with your lender’s loss mitigation department to explain your situation. If your case is strong and they are reasonable you may be approved.

If you do get behind on your payments and the lender serves you a foreclosure summons, contact an attorney to prevent them from foreclosing on your home. You can continue to negotiate a short sale with the bank while your attorney fights the foreclosure in court.

When a home is sold in a short sale, the leftover debt is called the deficiency. This is the difference between how much the borrower owed compared to what the home was sold for. Depending on the state you live in the bank can file another lawsuit to have a deficiency judgment placed against you.

Let's say John Hardluck's bank agrees to let the home sell for $150,000. Since he owed $160,000 on the mortgage, a deficiency of $10,000 will remain.

John owed the bank: $160,000

His home sells for:      $150,000

John still owes:           $10,000

Is John liable for the $10,000 that the bank did not get paid? Liable meaning, could the bank sue John for the $10,000 he didn’t end up paying?

Probably not if:

- He lives in a state that has anti-deficiency laws.

- He obtained a written deficiency waiver from the bank releasing him from liability of the deficiency prior to the sale.

Probably yes if:

- He lives in a state without any anti-deficiency laws. (Florida still allows deficiency judgments to be entered against borrowers)

- He did not get a deficiency waiver in writing from he lender before the sale.

If John is liable for the $10,000 deficiency, his bank would have to file a separate lawsuit in order to get a deficiency judgment placed against him. If John is poor and does not have any other assets the bank will most likely use the deficiency as a tax write off. Now if the bank thinks John does have assets, (like another property) they can potentially garnish his wages, file a lien against his other properties, and even freeze his bank accounts to collect on the deficiency judgment.

The bank's loss mitigation department (sometimes referred to as a "home preservation specialist") will have to approve the short sale before the home can be sold. The bank will have to agree to accept the money from the sale of the home in exchange for them releasing their lien on the property. Here are a few things you may want to do to get the short sale started.

Reach Out to Your Lenders Loss Mitigation Department

You must contact your lender’s loss mitigation department to let them know that you have endured financial trouble like job loss or pay cut. Use pay information and bank statements to draft a hardship letter. Their loss mitigation department should be able to provide you with the paperwork needed to submit with the sale offer. Prior to seeking out a potential home buyer it is a good idea to talk to your bank's loss mitigation department.

The paperwork will usually include:

- A hardship letter - This is a personal letter you write that explains why you are not able to stay current with your mortgage.

- Proof of income - Pay stubs or bank statements showing direct deposits from the previous 2 - 3 months

- You tax returns from the past two years

- Recent Bank statements - Dating back 2 -3 months

- Financial Question Form - Individually customized depending on the bank. It will help if you set up a spread sheet in excel and list all your monthly expenses.

Similar to a short sale, you have to obtain and fill out specific paperwork from the lender's loss mitigation department. They are the ones who will approve or deny giving the home to back to the bank. Lenders are usually less inclined to approve Deed in Lieus because the responsibility of selling the home is now transferred from the borrower to them.

For the Deed in Lieu to occur you must provide:

- Proof that you listed property for sale for a minimum of 90 days

- A hardship letter - This is a personal letter you write that explains why you are not able to stay current with your mortgage.

- Proof of income - Pay stubs or bank statements showing direct deposit

- You last 2 tax returns

- Recent Bank statements - Dating back 2 -3 months

- Financial Question Form - Individually customized depending on the bank. An excel spreadsheet that break down all your monthly expenses will help.

Lender Performs Title Search for Other Liens

The lender will then perform a title search on the property to check for other liens. They usually will only accept a deed in lieu of foreclosure if there are no other liens on the property. Sometimes there will be an exception if the lender owns the other liens on the property. Next they will set up a brokers price opinion (BPO) to determine the current market value of the home.

If Deed in Lieu is Approved

If they approve the deed in lieu, you will to sign the property over to the bank with a grant deed in lieu of foreclosure and an estoppel affidavit which contains the terms and agreements of signing over the property.

Usually the estoppel affidavit will contain the written agreement that says whether or not you are responsible for the deficiency after the lender is given the property. The lender will also have an agreement that that says you are acting on your own (you were not tricked or wrongly influenced) when giving the property to the bank.

A deficiency is more difficult to show with a deed in lieu of foreclosure because the property technically has not been sold. The potential deficiency is determined when the lender compares the amount you owed them to the current market value of the home. This is why a deed in lieu of foreclosure is usually considered to fully satisfy the debt unless specifically specified in the estoppel affidavit.  This means if the bank wants to still hold you responsible for the remaining balance they will have to clearly state it in the deed in lieu closing documents.

This is why it is so important to review this document prior to signing it. If you are unsure of what you are looking at or the bank is trying to hold you liable for the deficiency, it would be a good idea talk to an attorney.

Is the short sale option not working for you because you are having trouble finding a buyer? A deed in lieu may be the next possible option to avoid foreclosure.

A Deed in Lieu of Foreclosure - when the lender allows the borrower to give the home to the bank in exchange for canceling the borrower's obligation to the loan.

Created by Attorney Michael Stites & contributing editor Jared Speck

Updated 05/13/2016

Attorney Home > Foreclosure Research > Getting Out of Your Home: Short Sales & Deed in Lieu


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Tip: Use written letter or Email when corresponding with your lender. It keeps a record of what has been said and is simpler than recording phone conversations.

Find a Serious Buyer:

You can either try to find a buyer yourself or hire a realtor to find a buyer for you. The realtor may post the home for much lower than the current market value in order to get some legitimate offers on the property. It is tough because the bank will not tell a buyer the least amount of money they are willing to take. Submitting an offer on a home is usually a long and drawn out process and can be frustrating if the bank keeps rejecting offers.

Tip: It is usually best to find a real estate agent who has successfully help perform short sales in the past. The process can be long and incredibly frustrating for both the buyer and the seller.

Lender Must be Willing to Agree to the Short Sale:

After an offer is made on the property the lender will evaluate it and determine what will be most beneficial for them. If the offer is significantly lower than what the original borrower still owes they will most likely reject the offer. It really depends on the situation. It would be a good idea to obtain a written deficiency waiver to prevent the lender from suing you for the deficiency.

Note: Banks usually require the borrower to list the home for sale for a minimum of 90 days before submitting for a deed in lieu.

Deed in Lieu of Foreclosure VS Short Sale

Deed in Lieu of Foreclosure and Short Sale Comparison

What is a Short Sale?

Short Sale Example Situation

The Short Sale Process

Common Short Sale Questions

Deficiency Judgments after a Short Sale: What Happens to the Leftover Debt after a Short Sale?

Deed in Lieu of Foreclosure

Deed in Lieu of Foreclosure Process
Deficiency Judgments After a Deed in Lieu of Foreclosure: What happens to any remaining debt?

Related Posts:

The Step by Step Short Sale Process How to Get the Stubborn Bank to Accept Your Short Sale Offer avoid a deficiency judgment after your short sale do you need an attorney to negotiate your short sale

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