Short Sale vs Foreclosure or Deed in Lieu of Foreclosure

Which is better?

Which is better - a short sale vs foreclosure, or a deed in lieu of foreclosure? That's the question. If you're having difficulty making your mortgage payments, you may be wondering which distressed debt option is best for you?

Well, the short answer is - it depends on your specific situation. There are some that believe in some cases it may be best to just give them the keys and walk away. Whichever option you decide, it's best to have a strategy for your desired outcome and carefully weigh the pros and cons of each option.

Besides the credit impact of a short sale vs foreclosure, or a deed in lieu of foreclosure, there are several pros and cons you should consider. But first let's distinguish a short sale vs foreclosure, and a deed in lieu of foreclosure.

What is a Short Sale?

What is a Foreclosure?

A foreclosure is the legal procedure by which a lender holding a mortgage on your house forces a sale of your house to obtain repayment of your loan. Foreclosure proceedings are typically started by a lender when you do not pay your loan on time. The foreclosure process can vary from state to state.

What is a deed in lieu of foreclosure?

A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default to avoid foreclosure proceedings.

Now that we have an understanding of the differences between a short sale vs foreclosure and a deed in lieu of foreclosure, let's review the pros and cons of each. Then you can decide for yourself which is the best option for your situation. However, if you are facing foreclosure, I still highly recommend you consult a good real estate attorney in your state.

Benefits of Foreclosure

Foreclosure is not a very pleasant experience. It can be emotional and embarrassing. However, in some circumstances, it may be the best option. In any event here's a list of the benefits of foreclosure:

• No mortgage payments during the foreclosure process.
• Foreclosure proceedings can go on for months before you have to vacate.
• Your home is still yours until the foreclosure is final.
• No strangers are tramping through your home.
• Lenders will sometimes pay you to give up the keys after the sale.

Down side of Foreclosure

• You lose the rights of home ownership.
• You have to return to the rental market.
• Your lender may nail a Notice of Public Sale on your front door.
• Your credit may suffer more than a short sale.
• In many cases you may not qualify for a new mortgage for 4 to 7 years.

Benefits of a Short Sale

• Emotional benefit of controlling your own destiny by selling your home.
• Avoiding the social stigma of a foreclosure.
• You don't have to make payments if you don't want to.
• Usually you can qualify for a new mortgage in 2 years instead of 4 to 7.
• If you avoid 60 day late payments on your credit report you may immediately qualify for a new mortgage.

Down side of a Short Sale

• Your lender may take several months or even a year to decide.
• Your lender will require your personal records such as tax returns, bank accounts, assets and liabilities, and a hardship letter.
• You have to sell your home and keep it clean for showings.
• Inconvenience of buyers constantly walking thru your home.
• Even after waiting, there is no guarantee your lender will accept your short sale offer.
• Your credit can still suffer. A short sale may remain on your credit report for up to 7 years.

Benefits of a Deed in Lieu of Foreclosure

• Immediately releases you from most or all of the personal indebtedness associated with the defaulted loan.
• Avoids the public notoriety of a foreclosure proceeding.
• May receive more generous terms than a formal foreclosure.
• May hurt your credit less than a foreclosure.

Down Side of Deed in Lieu of Foreclosure

• Requires your lender's approval.
• Your lender may take months to review your request.
• Many lenders may treat a deed in lieu of foreclosure like a foreclosure on your credit report, so your credit may suffer.
• You may not qualify for a new mortgage for 4 to 7 years.

So, depending on your personal situation, when considering a short sale vs foreclosure, or a deed in lieu of foreclosure, one alternative may be better than the other.

However, in any event, afterwards you can still legally improve your credit. Remember, legal credit improvement is about requiring the credit bureaus and lenders to comply with the credit laws when reporting or furnishing your personal credit information. So, either learn how to legally improve your credit yourself, or hire a reputable credit repair organization to do it for you.