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Today we will be discussing a couple of the options for those who may be facing foreclosure on their homes. Short sales and deeds in lieu are very similar and often get confused, but they are both helpful methods that can help prevent you from going into foreclosure.
Short Sale
A short sale is when the homeowner sells their home to a third party for less than the money owed on the mortgage. The lender agrees to accept the proceeds made in the sale, in exchange for releasing the lien on the property.
Short Sale Process
The lender’s loss mitigation department must approve of the short sale before a transaction can occur. The seller must submit a loss mitigation application to be approved for a short sale and this includes:
- A financial statement, in the form of a questionnaire, that provides details regarding monthly expenses and income
- Proof of income (if applicable)
- Most recent tax returns
- Bank statements (two recent statements for all accounts)
- A hardship letter
More than likely you will need to provide that there is an offer from a potential purchaser as well on the application. Lender’s usually want there to be an offer before they consider a short sale. An exception to this is with the government’s Home Affordable Foreclosure Alternatives Program (HAFA). This aids the lender in approving of the short sale terms before the home is listed and the lender accepts the short payoff in full satisfaction of the mortgage. HAFA also prevents the lender from coming after the seller with a deficiency judgement.
Deficiency Judgements
The deficiency is the difference between the amount received in the short sale and what is actually owed on the mortgage. Many states prohibit deficiency judgments after foreclosures, but not many do for short sales. Deficiency judgments by state. To avoid a deficiency judgment, the short sale agreement must expressly state that the transaction is in full satisfaction of the debt and that the lender waives its right to the deficiency.
Deeds in Lieu
Deed in lieu is another option to help you avoid foreclosure if you can’t sell your home through a short sale. A deed in lieu of foreclosure is a transaction where the homeowner voluntarily transfers the title to the property lender in exchange for release of mortgage obligation.
Deed in Lieu of Foreclosure Process
Like a short sale, the borrower must request a loss mitigation package from the lender. What you will need to provide the lender with:
- A financial statement that provides detailed information about your monthly income and expenses
- Proof of Income (if applicable)
- Most recent tax returns
- Bank statements (two recent for all accounts)
- A hardship letter
If you are approved, you will receive two documents from the lender, one is a deed that transfers ownership of the property to the lender and an estoppel affidavit. The estoppels affidavit sets the terms of the agreement. It will include a provision that you are acting freely and voluntarily. It may include provisions about the transaction and if it’s in full satisfaction or if the lender has the right to a deficiency judgement.
Deficiency Judgments
In the case of a deed in lieu of foreclosure, the deficiency is the difference between the fair market value of the property and the total debt. In most cases, a deed in lieu of foreclosure will release borrowers of all liability and obligations under the mortgage, but not always. Most states do not have a law prohibiting a lender from seeking a deficiency judgment. HAFA deeds in lieu are considered full satisfaction of the debt owed. To avoid a deficiency judgment, the agreement must state that the transaction is in full satisfaction of the debt.
The Law Offices of Lora Fausett P.C. provides real estate law services including loan modifications, buying and selling legal assistance, short sales and deeds in lieu, mortgage foreclosure defense, and more.
Located in Glen Ellyn, Illinois and serving clients in DuPage, Cook, Kane, Will, and Kendall Counties.
For Information Call 630-858-0090
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