Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I would like to know more about this and how it actually works. I read about it and know what it is, but I was wondering how often it happens and what are the advantages and disadvantages of one? Why would someone do a short sale, if they can just do a deed in lieu of foreclosure? I am probably missing something, maybe it is very hard to do one? Do you need very little negative equity in order for the bank to agree? Please shed some light on this for me, thanks!
Deed in Lieu of foreclosure is a procedure that just speeds up the process. If you want to buy a home in the next 3 years or so, that is something that you can do to make sure that it is 3 years out. The way most lenders now look at foreclosure dates is that the "clock" for 3 years to be past is from when the home sold to the next owner. In some cases that could me more than a year from the date you were forced out. So, if you know that it is going to happen, going the deed in lieu is a consideration.
Short sales are different in that the owner gets rid of the property, but if they continue to make the payments the home does not totally ruin their credit. The lender can still go after you for the money that is "short", but the IRS is being "nice" and not requiring you to pay income tax on the amount that is short. They used to do that, something that compounded the bad stuff that was happening to someone
I would like to know more about this and how it actually works. I read about it and know what it is, but I was wondering how often it happens and what are the advantages and disadvantages of one? Why would someone do a short sale, if they can just do a deed in lieu of foreclosure? I am probably missing something, maybe it is very hard to do one? Do you need very little negative equity in order for the bank to agree? Please shed some light on this for me, thanks!
Let my tone in on this, I deal with this everyday. First you have to ask yourself do you want to keep the property, or let it go. Once you start it, it's hard to back out. A short sale, which requires the lender’s cooperation, relieves the homeowner of the burden, cost and emotional distress of a foreclosure.
To understand how a short sale works, suppose a homeowner obtained an loan of $150,000 to buy a $155,000 home that is now worth only $145,000. The costs to sell the home are expected to total $10,000. If the homeowner wasn’t able to pay the mortgage, the lender might agree to allow a short sale and cancel the $15,000 deficiency to avoid the costs and delays of foreclosure.
In many states, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency. A deficiency occurs when the amount you owe on the home loan is more than the proceeds from the sale (or auction) -- the difference between these two amounts is the amount of the deficiency. three to four years in the future, you can get hit with a deficiency judgment, the only thing you can do is file bankruptcy.
A "deed-in-lieu," in which the homeowner gives the home to the lender in a process that’s simpler, faster and less costly than a foreclosure. The cost savings is important because if the lender’s eventual sale of the home doesn’t result in enough money to pay off the mortgage and the costs of foreclosure, the lender typically can try to collect the deficient amount from the former homeowner.
A short sale or a deed in lieu may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the "deficiency"). The IRS treats forgiven debt as taxable income, subject to regular income tax.
Final thought. Keep in mind, as mentioned previously, it is up to the lender to accept a DIL. Also, some banks (Wells Fargo for example) require that your home be listed for short sale at least 90 days before they will "entertain" a DIL. In any event, and in addition to Mod's note, do not forget possible state income tax implications. Certain states will impose income taxes on imputed income imposed due to a 1099-C for cancellation of debt.
For example, in California, the possible state tax implications can depend on whether the loan is recourse or non-recourse. If the loans are non recourse, the state looks at the tax situation as a possible gain or loss...which may not be an issue if the owner is severely underwater. However, if the loans are recourse then you could have COD income that will be taxed at ordinary income tax rates. Some states do not conform to the Federal Mortgage Debt Relief Act (and the applicable exclusion from income)...so just keep that in mind for future reference.
From my understanding, "yes". However, it is entirely up to the lender and it is a negotiated process. Keep in mind that California, under certain circumstances, is an "anti-deficiency" state and that may alter what the lender would do. This type of work out can be tricky and anyone contemplating a DIL should seek counsel. The last thing you want is to sign something in the process that makes you personally liable; especially if you have purchase money mortgages. Side note on deficiencies. California Code of Civil Procedure 580(b) has the provisions that cover purchase money mortgages and the protection for such mortgages.
Each lender may have its own set of guidelines...some refuse to do any DILs.
The reason why I was asking was if a client says why should I do a short sale and not a DIL, as a real estate agent what would you respond? Because a DIL is rarely done and is very tough? A short sale takes less time and the bank is more likely to agree to the terms? Even though I have heard of short sales which take over 6 months...
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.