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Wednesday, February 29, 2012

Connecticut Short Sales and Deeds In Lieu of Foreclosures in a Nutshell

     In situations where homeowners with relatively small amount of unsecured debt are faced with foreclosure and who do not want to keep their homes Chapter 7 bankruptcy may not be the best first option. Chapter 7 Bankruptcy may not also be an option due to the income/asset situation of the homeowner. Other options to consider are a short sale or deed in lieu of foreclosure. A short sale is where the mortgage lender(s) approves a sale for less than the debt due it and depending on the homeowner's income and asset status the homeowner is released from their mortgage obligation without any or with some contribution and/or unsecured promissory note to the lender. Deed in lieu of foreclosure is where property is deeded back to lender with same analysis whether or not homeowner's release from the debt includes some contribution from them. In both situations the mortgage lenders require financial documents similar to mortgage modification applications. Lenders prefer short sales so they generally require the property be listed for a short sale first for a minimum of 3 to 6 months before considering a deed in lieu. Both of these options are available under the HAFA program for loans that are eligible for HAMP loan modification process which covers all Fannie Mae and Freddie Mac owned or guaranteed loans and loans serviced by HAMP participating loan servicers issued prior to Janaury 1, 2009. The advantage to pursuing a HAFA short sale or deed in lieu is that if you are approved for either the mortgage lender is required to waive any potential deficiency.
     The approval process of either of these options can take some time and for short sales you need to have a buyer that is willing to wait for the lender to come to a decision. The same holds true for a deed in lieu especially since you have to usually start the short sale process first before converting to a deed in lieu application. In many cases a foreclosure will be commenced before the lender has made a decision.   The good news is that both of these options are considered as suitable matters for the court's foreclosure mediation program. You can apply for this program and with the recommended assistance of a qualified attorney use the mediator to help negotiate either the short sale or deed in lieu. While in your in mediation the mortgage lender cannot proceed with its foreclosure so there is added incentive for them to accelerate their approval process. There are important tax considerations with the forgiveness of debt from a short sale or deed in lieu. Through December 31, 2012 any imputed debt from this forgiveness is exempted from Federal income taxation. Clearly if Congress does not act to extend this tax exemption the attractiveness of a short sale or deed in lieu will be greatly diminished.  Consequently, anyone considering a short sale now would be encouraged to make that decision quickly since as indicated above the process will take time and the clock on the federal tax exemption is ticking away.


  1. Your post is quite relevant to what I am looking up these days. Thank you for sharing.

  2. Your post is quite relevant to what I am looking up these days. Thank you for sharing.
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  3. The blog has discussed about the differences between a short sale and a deed in lieu of foreclosure. In short sale your lender allows you to sell your house at a price which is less than the amount of mortgages that you still owe. Again, in case of deed in lieu of foreclosure, your deed the property to the mortgage lender under the condition that all your outstanding mortgages will be forgiven. The lender then sells the house so as to recover the money. Both these mortgage options affect your credit score negatively. In case of a deed in lieu of foreclosure, your credit score gets reduced by nearly 250 points and in case of a short sale, your credit score drops by around 75 points.

  4. I cannot comment to the accuracy of the above comment concerning the point amounts drops in credit scores. It is true that deeds in lieu and short sales have a negative effect on your credit score and they are discussed in this blog article as alternative options to foreclosure. If there is a way to modify the mortgage for someone who wants to keep their home or sell the property and pay off the mortgage in full these are clearly better options. Unfortunately not all borrowers have these 2 options and have to choose an option which will hurt their credit.

  5. This is my first time i visit here.Great information about real estate.Thank you so much for share the great information..!!
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