When a homeowner becomes unable to continue making mortgage payments, the home is placed at an elevated risk for a foreclosure. The problem can be even worse when the homeowner owes more to the mortgage company than the home’s actual dollar value. This is what’s known as being “underwater.”
A foreclosure should be avoided at all costs because it comes with several unfortunate consequences. Luckily, homeowners have alternatives to succumbing to foreclosure. In many cases, the owner can turn to either a deed in lieu of foreclosure or short sale. In context, both options are similar, but they do have differences between them.
Understanding a Short Sale
A short sale occurs when a lender approves a reasonably priced home sale that amounts to less than what is owed on the mortgage. When the sale completes, the lien is released from the property. A few loose ends must be tied up before a lender will typically approve a short sale. For starters, the homeowner must provide substantial evidence that he/she can’t cover the mortgage payments by providing:
- Proof of income, if there is any
- Complete financial documents and statements
- Tax returns from the past 2-3 years
- Bank statements dating from the past 1-2 years
- A letter outlining the hardship being experienced
Before the short sale can be considered by the lender, they will most likely require an existing buyer that is financially ready to complete the transaction. Once these requirements are met, a lender will likely approve a home for a short sale.
Understanding a Deed in Lieu of Foreclosure
Both the short sale and deed in lieu of foreclosure share many of the same qualities. Both tactics end in the homeowner being legally freed from the mortgage contract. The process of the deed in lieu of foreclosure is a bit different, however.
When a homeowner experiences hardship with his/her finances and can’t sell the property via a short sale or regular home sale, he/she can attempt to pursue a deed in lieu of foreclosure. The same five types of documentation required for the short sale will also be required for the deed in lieu of foreclosure. Furthermore, lenders typically want the home to have been on sale via the market for longer than 3 months before they will consider this option.
If approved, the lender will issue two forms to the homeowner: an estoppel affidavit and a deed that will give ownership of the property to the lender. The affidavit will be responsible for the outlining the agreement and confirming that the homeowner is willingly transferring the home’s deed. Approval will happen once these two documents have been signed and completed.
In the events of both short sales and deeds in lieu of foreclosure, there is always the chance that the lender will pursue a deficiency judgment. This is because the lender is essentially agreeing to a settlement where they receive less financial compensation than what the mortgage debt is worth.
In some states, it is illegal for a lender to pursue a deficiency judgment. However, other states will allow it, and it does happen to real homeowners. This is why it’s incredibly important to make sure the documentation and contract agreement pertaining to the deed in lieu of foreclosure or short sale prevents the possibility of the lender later attempting a deficiency judgment.
Many people make the mistake of believing a short sale and deed in lieu of foreclosure are actually the same thing, but they are not. It is up to you to ensure that documentation is properly filed and audited for legal accuracy. This way, the chances of a lender pursuing a deficiency judgment are greatly minimized. When proper precaution is taken, a deed in lieu of foreclosure or short sale are both realistic alternatives to succumbing to a foreclosure.
Contact Our Firm for Professional Assistance
You likely still have questions or concerns about both a deed in lieu of foreclosure and a short sale. Our firm can answer any questions you might have, and we are fully equipped to help you embark on the best course of legal action. Call our offices or contact us online today for more information.