The short sale process is a headache, and as we regularly implore, you must have your house in perfect order or potential buyers will head for the hills. If a short sale isn’t an option, a deed-in-lieu is often superior to foreclosure.
In a deed-in-lieu foreclosure, the lender agrees to release the borrower of his loan obligation in exchange for the deed to the property. The lender will not pursue foreclosure on the delinquent homeowner, but may pursue a deficiency balance suit, if they are unable to recover the cost of the property.
DIL foreclosures better for your credit score
Deed-in-lieu foreclosures are easier on your credit score, but will still leave a substantial blemish that will make it much harder to find new credit, especially with a mortgage lending institution.
You may also be expected to pay taxes on the balance of the loan. This is the debt that the creditor has forgiven, because the IRS views this as income. If your balance is substantial, you are looking at serious tax penalties. That said, a federal relief program has been in effect since 2007 call the Mortgage Forgiveness Debt Relief Act, which will effectively releases you from tax responsibility in a deed-in-lieu foreclosure. You will want to consult with a tax professional or your bank to be sure you are free from a new tax burden under the provisions of this act.
Who qualifies for a deed-in-lieu foreclosure?
There is also a substantial list of prerequisites to qualify for a deed-in-lieu foreclosure. They are many and they aren’t universal, but rather dependent on your situation, bank and area. For example, you can’t have any liens on the home, the property cannot be in foreclosure and the house must be on the market for X number of days. Like in a short sale or loan modification, you must also prove to your bank that you simply cannot make payments, and that you and your home are candidates for a deed-in-lieu foreclosure.