Ilyce Glink published a great Q&A today regarding Deed-in-Lieu of Foreclosure.
Oftentimes, when homeowners are behind on their mortgage and owe more than the home is worth, they panic. Some will just decide they have no options and allow the home to foreclose. Some will investigate what other options may be available to them.
When facing foreclosure, you do have three options:
- Pay the lender the amount needed to bring your loan current
- Do a deed-in-lieu of foreclosure, if the lender agrees
- Sell your home "short" - also known as a short sale.
A short sale is a transaction where you sell your home for less money than is owed to the lenders. Such a sale requires lender approval and can be a lengthy process.
A deed-in-lieu of foreclosure is, basically, where you turn the home over to the lender and walk away without going through the foreclosure process.
These days, lenders are becoming more amenable to the deed-in-lieu process. Foreclosing on a home costs the lender money - a lot of money in attorney fees and court costs. I've heard to cost for a lender to foreclose on a home can be anywhere from $25,000 - $50,000. So, it may make financial sense for the lender to simply accept the keys and the deed to the home and avoid the whole foreclosure process.
Of course, this is also why lenders are becoming more friendly towards short sales. With a short sale, not only does the lender avoid the costs of the foreclosure process, but now they've also avoided the hassle of selling a home that they own. Win - win!
There are no set facts that determine which method may be best for you should you be facing a foreclosure. Your specific questions should be directed to your real estate agent, your attorney and/or your tax adviser. All options may have various legal and tax implications that must be fully investigated. Of course, we would also need to determine your lender's willingness to go along with each method. Also, many lenders will only consider the deed-in-lieu option after your home has been on the market for at least 90 days.
Each option will negatively affect your credit. I am told that a short sale has the smallest least negative impact on your credit. Next would be the deed-in-lieu of foreclosure, followed by an actual foreclosure, which will have the greatest negative affect on your credit.
Should you find yourself facing foreclosure, consider your options carefully. Talk to local professionals to determine the best route for you to follow.