Guide · Comparing your options
Short Sale vs. Deed in Lieu vs. Foreclosure
The short answer
A short sale is a sale for less than you owe, with the lender's approval. A deed in lieu means handing the property to the lender to end the foreclosure. Both need the lender to agree, and both should include a written waiver of any remaining balance. Fannie Mae lets borrowers get a new mortgage 4 years after either one, compared with 7 years after a foreclosure.
How do the three options compare?
| Short sale | Deed in lieu | Foreclosure | |
|---|---|---|---|
| What happens | You sell for less than the payoff | You transfer the deed to the lender | The court orders a public sale |
| Lender approval | Required | Required | Not needed; the lender starts it |
| Second mortgages and liens | Each must agree to release | Each must agree to release | Wiped out or paid from the sale in order |
| Money owed afterward | Ask for a written waiver | Ask for a written waiver | Lender may seek a deficiency judgment |
| Wait for a Fannie Mae mortgage | 4 years (2 with extenuating circumstances) | 4 years (2 with extenuating circumstances) | 7 years (3 with extenuating circumstances, with limits) |
What is a short sale?
You sell the property for less than you owe, and the lender agrees to accept the sale price. The lender must approve the buyer, the price and the closing statement. Lenders sometimes ask the seller to sign a note for part of the shortfall, so read the approval letter carefully and ask for the remaining balance to be waived in writing.
What is a deed in lieu of foreclosure?
You give the property to the lender and the lender ends the foreclosure. The lender usually wants clean title, so any second mortgage or other lien has to be released first, which can be hard. Ask for the agreement to waive any deficiency expressly. Some lenders also offer relocation money or extra time in the home.
Does a short sale hurt your credit less than foreclosure?
Less than many people think. All three are serious negative events on a credit report. The clearer difference is how soon you can qualify for a new mortgage, as the table shows, and whether you are left owing money afterward.
Will I owe taxes on forgiven debt?
Possibly. If a lender forgives part of the balance, it may report the forgiven amount to the IRS on Form 1099-C, and that amount can count as taxable income. Exceptions exist, such as insolvency. Speak with a tax professional before you sign.
Is there an option that keeps your equity?
If the property is worth more than you owe, none of the three is usually the best outcome. A regular sale, a direct cash sale or, on investment property, a bridge loan that pays off the mortgage can let you keep the difference. See selling in foreclosure in NJ or foreclosure bailout loans.
Common questions
Which is better, a short sale or a deed in lieu?
It depends on your lender and your liens. A short sale lets you control the sale and may bring a higher price. A deed in lieu can be faster when there are no second mortgages. Both need lender approval and should include a written deficiency waiver.
How long after a short sale can I buy a house?
Fannie Mae's guidelines require 4 years after a short sale or deed in lieu, or 2 years with documented extenuating circumstances. FHA and VA rules differ.
How long after a foreclosure can I get a mortgage?
Fannie Mae requires 7 years after a foreclosure, or 3 years with extenuating circumstances and added limits.
Do I have to pay tax on a short sale?
Forgiven debt may be reported on Form 1099-C and can be taxable, with exceptions such as insolvency. Ask a tax professional.
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This guide is general information about New Jersey and New York law and practice, not legal advice. Dror Partners is not a law firm or a foreclosure consultant. For advice about your case, speak with an attorney licensed in your state or a free HUD-certified housing counselor.