Short Sale vs. Deed in Lieu of Foreclosure | Which is Better

Today’s question is, what is the difference between a short sale and a deed in lieu?

Lets start with deed-in-lieu. A deed in lieu of foreclosure is a voluntary foreclosure. The borrower is re-conveying their entire ownership interest in the property back to the bank with the banks permission.

You are essentially giving the keys back to the bank prior to that foreclosure sale date. That is a deed-in-lieu of foreclosure.

How do junior liens factor in to all of this? 

What if I have a two-mortgage situation? Well typically in a two lien or a two-mortgage situation the junior lien holders will put the brakes on the deed in lieu of foreclosure.

If you recall, a deed in lieu is a conveyance. You are conveying your ownership interest back to the bank, to the primary lender. If you have another lender who has ownership interest in the property, they are not simply going to release their lien from title. Allowing that transaction to occur. They'll want something in exchange for releasing their lien. Within the contact of a deed in lieu transaction they typically wont get anything.

That is why it is so difficult to effectuate a deed in lieu, when you have two liens, subordinate or junior lien holders in play.

Deed's in Lieu Impact on Credit. 

We are noticing time and time again, these lenders are erroneously reporting the deed in lieu of foreclosure to the credit bureau, not as a deed in lieu but as a foreclosure and I suspect that has something to do with the reporting codes being similar. But again as of late we are seeing lenders mistakenly or erroneously report deeds in lieu as foreclosures and that’s showing up on borrowers credit reports as foreclosures.

That is something you want to be mindful of when you are pursuing a deed in lieu transaction.

What is the advantage of doing a short sale over a deed in lieu?

During a short sale transaction, you get to stay in the house during the entire short sale process. You are effectively buying yourself additional time in the home. Not to mention the fact, when we are talking about a two mortgage or a two-lien situation that second lien holder stands to gain from the net proceeds of the transaction. Meaning, they will be much more likely to release the lien from title and allow that transaction to close.

Short sales have a distinct advantage in a two-lien situation. Within a short sale transaction lenders don’t typically erroneously report a short sale on a credit report. It shows up as settled in full for less than the amount owed.

The biggest advantage of doing a short sale is the relocation incentive. 

In short sale transaction we find that many borrowers are eligible to receive relocation incentives to help with the cost of moving. So if you are thinking about doing a deed in lieu that a short sale may be your best bet because of all these advantages.

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