The Difference Between a Short Sale and Deed in Lieu

There is a big difference between a short sale and a deed in lieu.

In the case of a short sale, there are three parties to the transaction: The seller, the buyer and the mortgage company. Since the property isn't worth as much as the buyer owes on the mortgage, the buyer has to convince the mortgage company to take less than the amount owed on the mortgage. Depending on how much less the mortgage company is asked to settle for, it definitely could be a better deal for them than letting the property go into foreclosure. The seller usually doesn't get anything out of the deal since all the money goes to paying off the mortgage, paying the real estate salesperson's commission, closing costs, etc. The benefit for the seller is that they get out from under a big problem and avoid foreclosure and a probable deficiency judgment. The benefit for the mortgage company is that they avoid the costs associated with foreclosure don't have to keep a property in their REO inventory.

As far as the soon-to-be former owner of the property is concerned, the end result is about the same: they no longer have a mortgage payment to make. Nonetheless, for credit purposes, they are both considered a major derogatory item and most lenders treat them as a foreclosure for the purpose of deciding whether to lend to that person in the future.

Both of these are options to avoid foreclosure and are at the lender's discretion. Both of these solutions have generally accepted processes and guidelines that you must flow in order to be considered for either option. Here are the general guidelines for each.

Short Sale:

1. You must be behind on your mortgage. Typically at least 2 months.
2. You must owe more than the house is worth. In other words after all the closing cost you can not sell the house for the amount of the payoff.
3. The lender will order their own assessment of the value and decide whether to accept an offer for a short payoff.
4. You must provide your lender with ALL the required documentation in one very well organized package for consideration. Incomplete packages or disorganized packages may be ignored.
5. The lender at their discretion can accept, reject or counter the offer.
6. If rejected or countered you will not receive anything in writing.
7. If accepted you will receive an acceptance letter detailing all the terms.
8. Most lenders require the house be listed with an RE agent for consideration for a short sale.

Deed in Lieu:

1. This is a less common solution that the lender may approve if attempts to short sale fail.
2. Lenders prefer for you to 'play'' the short sale game rather than processing a deed in lieu of foreclosure.
3. If you have more than one lien against the property a deed in lieu is not likely. In fact, we have never seen such a case as the 1st lien holder can not dissolve and resolve the junior liens through the foreclosure process.
4. Most lenders who allow deed in lieu require the home be listed at or slightly below fair market value for 3 to 6 months prior to considering thsi option.
5. It is NOT a very common option because the deed in lieu means that the investor is taking the property back into inventory and assuming the responsiblity for liquidating the asset.