deed in lieu vs short sale

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California Deed in Lieu vs. California Short Sale Credit Damage to your credit score seems to work like this:  (there are many exceptions) Short Sale (the least amount of damage) Deed in Lieu Foreclosure Some may say a deed in lieu does the same amount of damage as a foreclosure, but in our opinion that view may only considers the computer score.  A deed in lieu may look more responsible to someone reviewing your credit history.  Additionally, people with high credit scores should also consider the late payments will do to their score.  Note: FICO 2008 is coming out soon and scoring may be different in the future.  Additionally some people seem to give to much value ot credit.   A major national publication guessed a third of Americans may lose their homes by the time the market is done adjusting down.  Cash will be king.     Taxes As of May 2008, California has not yet aligned its tax code with the federal loan forgiveness act.  Therefore, a short sale may peg some people with taxes for loan forgiveness which a deed in lieu might avoid.  In fact in our opinion it is wrong for lenders to issue a 1099 after a deed in lieu or a foreclosure in certain circumstances.  (Being that for some sellers a short sale could be a very expensive mistake and for most of the other sellers it is mistake to go into default on the senior loan, we have no idea why Realtors would have people do short sale without legal advice.) Deficiency In California there is a presumption that a deed in lieu of foreclosure will release the seller from financial liability for the underlying notes or loans.  So far all the lenders have been willing to release our clients from a deficiency - in writing.  However, there are still some wrinkles that some lenders want to throw at us.  For instance some lenders wish to reserve the right to foreclose.  This is something we think should be avoided when negotiating a deed in lieu.  It is far better to work out problems with the title ahead of time.  California short sales are becoming more difficult.  Many seconds lien holders and some first lienholders are unwilling to release the sellers from a deficiency.   Sometimes the lenders just need to have the law explained to them and then they change their minds.  There are many  strategies open to sellers while they are still current. Do not stop paying your loans until you have set up your walk away plan or workout strategy.  There is no reason to assume a short sale is going to work.... particularly because more than half don't.  If someone is telling you a short sale will save you, make them put it in writing.  Remember a Realtor is not licensed to explain what the escrow instructions mean to you or whether your are released from a deficiency.  If someone tells you to tells you to sign the paperwork - ask him to guarantee your release from a deficiency in writing.

Last Updated ( Sunday, 25 May 2008 )

 

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