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Why Use a Deed in Lieu of Foreclosure or a Short Sale?

A Deed in lieu of foreclosure (also known as a Bargain and Sale Deed) and short sale are both alternatives to foreclosure. They are very similar, and their differences depend on the details of the situation. They are attractive solutions because they do not hurt the borrower's credit as much as foreclosure would.

 

What Is a Deed In Lieu of Foreclosure?.

With a deed in lieu of foreclosure, the property owner deeds the property to the lender in exchange for the lender canceling the mortgage loan. The lender sells the home and keeps the proceeds.

 

What Is a Short Sale?

If you owe more than your home is worth, a short sale may be the appropriate solution. In a short sale, the property owner sells the property and transfers the proceeds from the sale to the lender. The lender agrees to accept less than the balance owed on the mortgage. The loan deficiency remaining after the sale is typically forgiven; however, this is not always the case.

 

What Are the Requirements for a Deed In Lieu of Foreclosure or Short Sale?

  • the residence must already be on the market for a certain number of days (typically 90 days)

  • there can be no liens on the property

  • the property cannot already be in foreclosure

  • the offer of a deed in lieu must be voluntary

  • for a short-sale, the seller must have a hardship

  • the house must be priced reasonably

 

What Are the Tax Implications?

If the lender forgives over $600 of your loan balance, this may create additional tax liability. For example, if you owe $1m and your home is worth $900k, when you deed or sell the home, the additional $100k once owed but now forgiven by the lender would be considered your "income" for tax purposes.