Short Sale vs. Deed in Lieu of Foreclosure: Which Fits You?

When you cannot keep up with your mortgage and a loan modification is not available, two common foreclosure alternatives are a short sale and a deed in lieu of foreclosure. Both let you leave the home without a foreclosure sale, but they work differently and carry different risks. This guide compares them so you can ask the right questions before you decide.

What is a short sale?

In a short sale, you sell your home for less than you owe on the mortgage, with your lender's approval. The lender accepts the sale proceeds and releases its lien on the home. You usually need to find a buyer, and the lender's loss mitigation department must approve the sale. If you have a second mortgage, a home equity line or other liens, those lienholders generally have to agree too.

What is a deed in lieu of foreclosure?

With a deed in lieu of foreclosure, you voluntarily transfer ownership of the home to your lender, and the lender releases the mortgage. You do not need to find a buyer. Lenders often approve this only when the home has no other liens besides the mortgage, and some require you to try selling the home first.

Short sale vs. deed in lieu of foreclosure: the key differences

• Buyer. A short sale needs a buyer. A deed in lieu does not.

• Other liens. A short sale can work with other liens if every lienholder agrees. A deed in lieu is generally unavailable if other liens exist.

• Lender approval. Both need a loss mitigation application and financial documents. Approval is never guaranteed.

• Credit. Both can hurt your credit, and the effect is often close to that of a foreclosure. The difference is usually small.

• Equity. If your home is worth more than you owe, selling it normally is usually a better choice than either option.

Will I still owe money afterward?

Possibly. If the sale price or the home's value is less than your mortgage balance, the difference is called a deficiency. In many states, a lender can still pursue a deficiency after a short sale or a deed in lieu, unless the agreement says otherwise. Before you sign, make sure the agreement states in writing that it satisfies the debt in full and that the lender waives any deficiency. Get this reviewed by an attorney.

What about taxes?

If a lender forgives part of your debt, you may receive a tax form (Form 1099-C), and the forgiven amount can sometimes count as taxable income. There are exceptions, so talk with a tax professional about your situation.

Which foreclosure alternative fits you?

• A short sale may fit if you can find a buyer, want to avoid a foreclosure on your record, and want to try to avoid a deficiency.

• A deed in lieu may fit if the home has no other liens, you have little or no equity, and you want a faster, simpler exit.

• If you want to stay in the home, ask first about a loan modification or forbearance. Read Loan Modification vs. Forbearance.

Mistakes to avoid

• Do not stop responding to your servicer. Silence can speed up foreclosure.

• Do not sign a short sale or deed in lieu agreement without understanding whether you will still owe a deficiency.

• Do not pay upfront fees to anyone who guarantees they can stop your foreclosure.

• Do not wait until a sale date is close. If one is already set, read how to stop a foreclosure sale date.

Frequently asked questions

Is a short sale better than a foreclosure?

It often is, because it avoids a foreclosure sale and gives you more control. Both can still hurt your credit, and the details depend on your lender and your state.

Do I need a buyer for a deed in lieu of foreclosure?

No. You transfer the home to your lender, though some lenders may ask you to try selling it first.

Can I still owe money after a short sale or deed in lieu?

Possibly. Unless your agreement says the debt is satisfied in full and any deficiency is waived, the lender may be able to pursue the remaining balance in many states. Have an attorney review it first.

Related guides

How to Avoid Foreclosure and Hawaii Foreclosure Timeline. See all of our foreclosure alternatives.

Talk to Summit Real Estate Law Firm. If you are weighing a short sale, a deed in lieu, or a way to keep your home, call (866) 259-8777 or contact us to discuss your options and our foreclosure defense services.

This guide is general information, not legal advice. Foreclosure laws and lender programs change, and every situation is different. Speak with a licensed attorney about your specific case.