Deed in Lieu of Foreclosure vs Short Sale Process

Foreclosure, by many experts is considered to be a devastating blow for your credit score. Hence if you need to, they advise you to go with Deed in lieu of foreclosure and short sale. Both of these processes can be taken as alternatives to foreclosure.

This does not mean that these two alternatives do not affect your credit score in any way, they do. However, the impact is a lot lesser in magnitude. To understand better what this paragraph has talked about, both of these processes need to be discussed in a way that is understandable for the normal consumer, only then can one come to a conclusion.

Hence this article basically revolves around deed in lieu of foreclosure vs short sale processes. First comes first, the deed in lieu of foreclosure will be discussed. What exactly happens in a deed in lieu of foreclosure?

In this particular process basically the borrower or the person in debt hands over the deed of property to the lender who in exchange agrees to cancel any court action or decides not to initiate any foreclosure proceedings. So basically what happens is that the borrower in return for the loan that was taken gives over voluntarily any piece of property that will cover the loan that was taken. However, this is one drawback associated with this particular process.

The lender has the complete right to not forgive a certain deficiency balance that still remains after he or she has sold the property handed to him or her by the borrower. Another possible drawback that is often overlooked by many is the possibility of tax liability.

The Federal Law clearly states that the lender is supposed to file whenever he or she forgives a loan exceeding $600. Now in this case if a note or a file is presented to the Federal Law, the former property owner might be taxed heavily for the amount will be considered as income, and as you know any income earned is taxable by the government. Hence in this process, perhaps the most important aspect is the fact whether the lender forgives all deficiency balance. In order to remain safe, one must read the contract thoroughly and recognize any loop holes present in it. Professional attorneys must be hired, since the matter is very complicated and even the slightest of error can cause much greater complexities.

Another similar type of an alternative to foreclosure is the short sale process. It is similar to the former process that has been discussed, but there is some slight dissimilarity present as well. In the short sale process, the lender and the borrower go through a short sale of a particular property where the lender is paid back a particular part of the money that was loaned out. In this process the deficiency balance is typically forgiven by the lender.

However, one difference between the short sale and the deed in lieu of foreclosure process is that in this particular scenario the rightful ownership that is basically the deed, remains with the borrower and is not handed over to the lender. Now why would lenders choose this particular option?

The most appropriate answer to this question is that, most lenders do not want to own a distressed piece of land and would rather go with the simpler process of receiving a certain amount of cash in return. This way they can receive the amount back, which they had previously owned without getting involved in time consuming and expensive processes.

Considering both these options, experts advise people to usually go through the short sale process since it is less complicated and much simpler than the deed in lieu of foreclosure and the foreclosure process itself. However, nowadays most companies or agencies have started asking borrowers to give something in return for the deficiency balance as well instead of simply forgiving it; hence it is highly essential that no matter process you wish to choose, you read the contracts thoroughly. Moreover, one should not make the sole decision of choosing an alternative to foreclosure keeping in mind, one particular point of view.

You need to balance out your risks and study them properly in order to achieve and get a clearer picture of the entire situation. One must also keep in mind, especially in the case of the short sale process how badly the distressed piece of land will affect your books. Moreover, your local law body might also have a strong influence on the decision that you make.

A similarity, when it comes to the short sale and the deed in lieu of foreclosure process is that in both cases the lender has to file a 1099C if the deficiency balance exceeds $600. Hence in both cases, the former owner of the property will be taxed on the income generated.