Short Sale vs. Deed-in-Lieu: Best Choice?

Homeowners facing foreclosure often have the option of selecting a short sale or a deed-in-lieu of foreclosure as a possible solution to their financial difficulties. But are they? Which is the best choice? Like most alternatives, both have their upsides and their downsides. Understanding these options is the only way to make a truly informed decision.

In a short sale, your lender takes the loss
When you decide to use a short sale to prevent foreclosure, you should understand that the sale must have the lender’s approval and that lenders don’t always agree. What the lender is doing when he accepts, is permitting you to sell your home for less than you owe him and taking the loss himself. If he does go along with the short sale, it will relieve you of the burden (arrearages) as well as the cost, emotional strain and embarrassment of a messy foreclosure procedure. On the upside, a short sale is far less destructive to your credit rating than a foreclosure, as it is supposed to be listed as a “settled debt” on your credit report. However, it is still harmful to your credit score and can reduce it by 200 points or more.

On the downside, the lender could always go after you to collect the difference between the short sale price and what you owed him by getting a deficiency judgment against you. However, more often than not, this doesn’t happen simply because he knows that there is no money to recover and that he will have to pay all the costs of the legal action.

deed-in-lieu may be your fastest way out
A deed-in-lieu of foreclosure is when you give your home back to your lender, take your losses and thereby prevent the foreclosure. Lenders will frequently accept this because it is a less expensive and time consuming process for him than a full foreclosure action. The upside is that a deed-in- lieu is a faster solution than a short sale and that it is more likely to be acceptable to the lender. The ramifications to your credit score are about the same as the short sale.

On the downside, if the lender eventually sells the home for a price that doesn’t pay off the original mortgage amount, he can get a deficiency judgment and try to collect it from you. Once again, however, he knows that you can’t get blood out of a stone and probably won’t proceed if there doesn’t appear to be any money to recover.

Select either Short Sale or Deed-in-Lieu as early on as possible
The sooner you act on either a short sale or a deed-in-lieu the better. Once the foreclosure process is activated, you will not be in a strong position to negotiate with your lender because payment arrearages, interest and penalties have piled up. He can hold you financially responsible for his losses and seek a deficiency judgment that will appear on your credit report even if you don’t have the money to pay it. In either case, however, avoiding foreclosure is always a better choice in terms of the effect on your credit.

First-time homebuyers must close by Nov. 30 – contract not enough

WASHINGTON – April 24, 2009 – If first-time homebuyers wait until November to sign a sales contract, it’s probably too late to get the $8,000 tax credit. To qualify, buyers must close before Dec. 1 – a signed contract is not enough. New construction should be started by mid-summer to qualify.

According to the National Association of Realtors, a “home is considered as ‘purchased’ when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.”

Noting that deadline, the National Association of Builders kicked off a campaign notifying buyers that if they want the tax credit, they should plan to sign a construction contact soon.

Mike Dishberger of Sandcastle Homes Inc. in Houston, Texas, says that building a home from scratch can take anywhere from four to six months depending on the floor plan and location. Assuming it takes the full six months, first-time homebuyers should sign a new-home construction contract no later than May 31, 2009.

While it’s possible to rush an existing-home sale and go from contract to closing in only a few weeks, that schedule could cause a problem for last-minute buyers who wait until November. If an onslaught of buyers hope to beat the clock, title agencies and others involved in the closing process could get backlogged during November, and the IRS does not consider “planned closing dates” for the tax credit – only actual closing dates.

To qualify for the tax credit, home buyers must have not owned a home for three years prior to the purchase and have a modified adjusted gross income (MAGI) less than $95,000 for single tax payers and $170,000.