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Deed in lieu of foreclosure

With a deed in lieu of foreclosure, the property owner deeds the property to the lender in exchange for the lender canceling the mortgage loan. This was a popular option back when homes in foreclosure generally had positive equity; the lender could sell the home and keep the profit. In today's housing market, fewer and fewer lenders will accept a deed in lieu. However, because a deed in lieu reduces the time and cost of repossession and offers protections in the event that the borrower files for bankruptcy, many lenders are still interested in this solution.

Short sale

If you owe more than your home is worth, a short sale may be the appropriate solution. In a short sale, the property owner sells the property and transfers the proceeds from the sale to the lender. The lender agrees to accept less than the balance owed on the mortgage. The loan deficiency remaining after the sale is typically forgiven; however, this is not always the case.

The requirements for a deed in lieu of foreclosure or short sale include:

  • the residence must already be on the market for a certain number of days (typically 90 days)
  • there can be no liens on the property
  • the property cannot already be in foreclosure
  • the offer of a deed in lieu must be voluntary
  • for a short-sale, the seller must have a hardship
  • the house must be priced reasonably.

Tax considerations

If the lender forgives over $600 of your loan balance, this may create additional tax liability. For example, if you owe $1m and your home is worth $900k, when you deed or sell the home, the additional $100k once owed but now forgiven by the lender would be considered your "income" for tax purposes.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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