For many homeowners who are struggling to make their mortgage payments, keeping their home simply is not an option. The good news is that these homeowners do not have to wait for their lender to foreclosure. They have two alternatives:
- Deed in Lieu of Foreclosure; and
- Short Sale.
What Is A Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a negotiated remedy between a borrower who has defaulted on his mortgage loan and the lender. A deed in lieu of foreclosure allows the borrower to transfer title to the property to the lender and avoid a foreclosure. If the lender agrees to accept a deed in lieu of foreclosure, the borrower will sign, among other documents, a deed which transfers ownership of the property to the lender.
If a lender agrees to accept a deed in lieu of foreclosure, the borrower should be sure that as part of the agreement, the lender will waive its right to seek a deficiency judgment against him for any short fall. If the lender does not waive its right to seek a deficiency judgment, the borrower could be liable to the lender for the difference between what he owed on the property at the time the deed in lieu of foreclosure was executed and the amount for which the lender ultimately sells the property.
What Is A Short Sale?
A short sale is also a negotiated remedy between a homeowner who has defaulted on his mortgage and his lender. A short sale is an agreement by the lender to accept less than what the homeowner actually owes on the mortgage.
There are instances where the lender may impose conditions upon its acceptance of a short sale. The most common conditions are:
- The requirement that the homeowner sign a note for the difference between what he owes on the mortgage and the amount the lender agrees to accept as a payoff of the loan; and
- Reservation by the lender of its right to seek a deficiency judgment for the short fall.
What If There’s Subordinate Financing?
It is not unusual for a homeowner to have a second or even a third mortgage on the property. In cases where there is subordinate financing in place, the subordinate lien holders must agree to the short sale or deed in lieu of foreclosure. In order for a short sale or deed in lieu of foreclosure to work, the subordinate lien holders must release their liens on the property. In order to encourage the subordinate lien holders to agree to a short sale or a deed in lieu of foreclosure, the holder of the first mortgage may offer a financial incentive for release of the subordinate liens.
Getting Legal Help
If a homeowner utilizes a deed in lieu of foreclosure or short sale to avoid foreclosure, he may face a number of consequences including:
- A deficiency judgment;
- Low credit score; and
- Tax liability on the amount of the debt forgiven by the lender.
If you are considering a short sale or a deed in lieu of foreclosure, you should contact an experienced foreclosure attorney in your area. Your attorney will explain how short sales and deeds in lieu of foreclosure work and will advise you of the short term and long term ramifications of each option.
