When you’re underwater on your mortgage, meaning the home’s value is less than what you owe the lender, several options for remediation are available. The bank looks to minimize its losses and evaluates which option is the least costly. Before agreeing to a deed in lieu by which a homeowner willingly leaves the property and gives the deed back to the lender, avoiding foreclosure, lenders require that the homeowner proves he tried to sell the home as a short sale -- and wasn’t successful.
Banks will scrutinize your financial position before agreeing to any remediation. You don’t need to be behind in your mortgage payment to request a short sale or deed in lieu, but the lender needs to know why you can’t continue to pay your mortgage. Job transfers, medical issues, the death of a spouse, loss of a job – these are legitimate reasons for declaring a hardship and are outlined when you give supporting information to the lender, including a hardship letter and several months of bank statements.
Attempt a Short Sale
To prove you tried to sell the house before requesting a deed in lieu, the house must be listed for at least 90 days with no offers. Declined offers and the contracts attached to them are also submitted. Send the lender your listing agreement and a copy of the multiple listing profile. Borrowers of loans backed by Freddie Mac are also required to attempt a short sale before requesting a deed in lieu.
Maintain the Home
Many short sale owners remove all appliances and forgo maintaining the home, both inside and out. These conditions are frowned upon and indicate to the bank that the home's poor presentation may have prevented a successful short sale. Lenders are less likely to cooperate with an owner who neglects or destroys the property.
Agree to Leave
Agreeing to vacate the property and leaving it in good condition are prerequisites to the lender approving a deed in lieu. The lender may even offer you a cash incentive to help in your relocation, especially if the time frame for leaving is imminent. A lender representative visits the home, takes photographs and is given the keys before the money is handed over. Be sure the lender signs an agreement not to hold you responsible for the outstanding money owed on the house.
Whether you experience a short sale, deed in lieu or a foreclosure, your credit score is diminished. Fair Isaac Corp. -- FICO-- advises there is no significant difference in the damage you do to your credit, whether you short sale, are foreclosed on or do a deed in lieu on your home. Your best course of action, when you find yourself in a difficult financial situation, is to request a loan modification. If unsuccessful, attempt a short sale before considering a deed in lieu or foreclosure.
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