Which is better, short sale or deed in lieu?

March 20th, 2010 by Jarad

Question: What is a Deed in Lieu? Which is better, short sale or deed in lieu? I am in So. California.

Answer: – We explain what a Deed in Lieu of Foreclosure is in our free reports section. With a deed in lieu foreclosure you are giving the home back to the bank. By giving or deeding it back to the bank, the deed is considered full payment of the mortgage loan, so there cannot be a deficiency judgment. However, there are certain restrictions like all junior lien holders must be satisfied and there must be clear title. Although you’ll be avoiding a deficiency judgment, the bank will 1099 you for the deficient amount. This deficient amount is calculated by taking the difference between the fair market value (FMV) and the outstanding debt. As far as credit issues, a deed in lieu of foreclosure shows up as “Acquisition or Abandonment of Secured Property” and is very similar to an actual foreclosure.

A short sale on the other hand has fewer restrictions but is very similar in avoiding a deficiency judgment. You can ask the bank to satisfy the loan so it’s paid in full. You will be 1099 for the deficient amount. And for your credit, a short sale shows up as a “settled debt” which is very similar, however most credit experts believe a short sale is better on your credit report than a foreclosure or deed in lieu of foreclosure. I would have to agree…but it’s not by much. Any way you go, it’s going to be bad on your credit.

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