Short Sale vs. Deed-in-Lieu of Foreclosure
In my most recent post, we compared the merits of pursuing a short sale against suffering a foreclosure. After establishing the guiding principle that foreclosures should be avoided whenever possible, we discussed a few of the advantages of a short sale. But how does a deed-in-lieu of foreclosure fit in with all of this? Obviously, a deed-in-lieu is better than a foreclosure from the mortgagee’s perspective, but how does it stack up against a short sale?
No Clear-Cut Answer
It was easy to resolve the foreclosure vs. short sale question because foreclosures are, generally speaking, a worst case scenario. As such, a blanket conclusion supporting short sales was easy to reach. That’s not the case when looking at the short sale vs. deed-in-lieu issue. There are strong arguments for both and the right answer can be very context-specific.
Differences of Opinion
Let’s look at what various folks are saying about the two options and how they compare with one another. These perspectives may provide you with an idea of whether one should prefer a short sale or a deed-in-lieu for a specific set of circumstances. None of these sources or their statements should be considered a definitive source, as the wide ranging differences of opinion will undoubtedly demonstrate the lack of a certain answer suitable for everyone.
DebtKid.com compares the two options and sees them as near-equals. The site recognizes that deeds-in-lieu are the faster option, but reminds us of the risk of a deficiency judgment.
Lending Tree provides a similar assessment. A deed-in-lieu offers more convenience, buy may involve greater risk. Additionally, the site reminds us that lender cooperation is necessary for either option to work.
Upside Down Real Estate doesn’t reach a definitive conclusion on the matter, but it does remind us to carefully consider the tax ramifications. It also cautions anyone who uses a deed-in-lieu to read the fine print–some lenders may try to reserve the right to foreclose in order to “clean up” title. That’s something you don’t want to sign off on!
Bills.com observes that some lenders will be more likely to accept short sales than deeds-in-lieu because short sales don’t require them to ever take title to the property. Many lenders don’t want these properties to show up on their books, which can make it hard to successfully pull off a deed-in-lieu.
Richard Geller considers short sales to be the winner of the short sale vs. deed-in-liue contest. He describes the short sale as a way of “fixing the problem for yourself and for the mortgage company.” However, Geller’s assessment of one’s ability to secure financing for another home in the wake of a short sales appears to be overly optimistic.
MortgageReliefFormula also comes down on the side of short sales. The site argues that lenders are less likely to accept deeds-in-lieu due to clean title concerns and that there’s no appreciable credit score benefit to either approach.
Conclusions
Overall, the deed-in-lieu approach wins in terms of speed and ease. However, it looks as though short sales ahve a greater likelihood of approval and that the provide greater protection to the buyer. There’s an ongoing debate about the impact of either option on one’s credit score, with no clear consensus readily apparent.
The bottom line in the short sale vs. deed-in-lieu debate is that the mortgagee really needs to consider all relevant factors specific to his or her individual situation in order to make the best possible decision. One’s surrounding circumstances can play a huge role in making the right choice.
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