Short Sale Or Deed In Lieu Of Foreclosure – What To Do When You Owe More Than Your House Is Worth?

Richard Geller asked: If you owe more than your house is worth, what are your options? One is that you can keep your home and continue making payments. Eventually inflation will increase the value of real estate and you should be okay. This may take five, ten or fifteen years but it will happen. More inflation is pretty much guaranteed. Of course, one can question the wisdom of paying every month on an asset that is falling in value and that is not worth what you are paying. There is an ethical and moral issue here. I won’t touch that one because you have to do what you are personally comfortable with. My job is to give you some options, and let you decide what you want to explore further. Because many homeowners face further complications. They cannot afford their existing mortgage. They may have an ARM that is resetting. Or a balloon payment that means a mortgage must be refinanced. But in today’s market that may be impossible. For people who cannot afford their monthly payments and cannot refinance, and who owe more than their house is worth, a short sale may be the answer. More about short sales in a moment. Deed in lieu seems preferable. In deed in lieu, you deed your house to your mortgage lender and that ends the foreclosure process. What could be simpler and more obvious? But hold on. The lender may still go after you in court for their financial losses. And they often report deed in lieu on your credit report like a foreclosure. Sometimes you can negotiate this. But the simple fact is that lenders do not like doing deed in lieu of foreclosure, especially if you owe more than your house is worth. You have to realize that you think you have a problem (and you do), but your lender has a problem also. And deed in lieu does not solve your home loan lender’s problem. They are not in the business of owning houses. If they accept a deed in lieu they must fix up your house and market it and sell it. That is a problem for them. It costs them many tens of thousands of dollars in additional losses. You can solve that problem for them by doing a short sale. You sell the property to a buyer and the lender agrees to accept the proceeds that the buyer pays as full payment of the mortgage loan. The mortgage lender may still come after you for their financial loss, unless you get them to agree otherwise. And the lender may make a bad report about you to the credit bureaus — or they may not. You can negotiate all this. With short sales in lieu of foreclosure you are fixing the problem for yourself and for the mortgage company. They may take a loss but at least they get out of a non-performing loan. You get out from under and you can even buy another house with little or no money down and bad credit, if you know how to. It is the best of all worlds given a tough situation. Caffeinated Content

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