If you are having difficulty affording your home during hard economic times, you may be able to avoid foreclosure through either a short sale or a deed in lieu of foreclosure. While neither option is as desirable as staying in your home, they do at least help you avoid the costs and hassles associated with foreclosure.
What is a short sale?
Advantages of a short sale:You no longer have a mortgage payment. You can buy another home in 2 years, rather than 5-7 years, if you foreclose. You save yourself the costs and fees usually associated with foreclosure.
Disadvantages of a short sale:
Your credit report may be damaged if your lender reports the short sale to credit monitoring agencies. If you owe money to more than one creditor (for example, if you have taken out second and third mortgages on your property), they will also have to agree to the short sale because they, too, will be paid an amount less than what you owe them.
What is a deed in lieu of foreclosure?
Advantages of a deed in lieu of foreclosure:
Completely satisfies your loan obligation.
Your credit rating is not as damaged as it is by a foreclosure.
New option: Deed for lease or mortgage to lease
A short sale is the sale of your home for an amount less than the amount you still owe on your mortgage. The sale does not have to be to your lender, but your lender has to agree to it. Borrowers choose this option when they cannot afford to continue making monthly mortgage payments and cannot pay the difference between the sale price and the unpaid mortgage amount. However, the borrower is not freed from his obligation to repay the remaining mortgage balance unless the lender agrees. Many lenders require that disadvantaged borrowers provide proof of economic or financial hardship before agreeing to a short sale.
A deed in lieu of foreclosure transfers ownership of your home to your lender to pay off your loan and avoid the foreclosure process. Prior to an ownership transfer, the lender and borrower must enter into a settlement agreement that includes a sale price for the home that is at least equal to its fair market value. The borrower must also enter into the settlement agreement voluntarily and may be required to provide written proof that he is doing so.
However, issues arise when there is more than one lien holder on the property. If you have outstanding judgments or other unpaid mortgages, your lender would be assuming responsibility for payment of these outstanding obligations if it purchases your home by deed in lieu of foreclosure. Under these circumstances, your lender may wish to foreclose on your home in order to wipe these liens out.
Another alternative to foreclosure, but relatively new, is “deed for lease” or “mortgage to lease” program. This rent-back program was introduced in 2009 by Fannie Mae and banks are trying to implement their own programs.
This rent-back idea is tied to the deed in lieu of foreclosure program in which the lender would have to agree to allow the defaulting borrower to stay in the home as a renter for one to three years. Not everyone qualifies for this program, since it would be at the discretion of the lender.
Bottom line: If you are having trouble making your mortgage payments, you should discuss these options with your lender as soon as possible. It could save you the time, trouble and hardship of going through the full foreclosure process.
