Foreclosure is not the only option. short sale or deed in lieu might be better?

Foreclosure, Deed in Lieu, Short Sale – Which is Better?

Buying after foreclosure is a topic that I am passionate about.  You should know that there is light at the end of the tunnel.

You CAN buy again after losing a home to financial hardship.

This article isn’t meant to be a rant about what went wrong.  It is a road map for making more informed decisions when faced with the inevitability of losing your home.

By making more informed decisions, you will be empowered with the opportunity to buy again after foreclosure a quickly as possible. By now, most distressed homeowners have discovered that a loan modification is not a viable option.

Yes, I know there are a few homeowners that received a modification, and of those folks – I know many that ultimately realized that they are still so far upside down on their home that a temporary reduction in the rate and payment does absolutely nothing for staying in the home long term.

If you are one of the vast majority that did not qualify for a loan modification, or you have a modification but still see no light at the end of the tunnel, you have three options available to you to close this chapter, and start on the road to recovery and once again, homeownership.

Which Option is Best for You?

The best option is going to depend on what’s best for you.  Let’s look at each option so that you better understand the consequences of choosing.


A foreclosure can occur once your mortgage payments fall behind 90 days or more. If you do nothing, and let the bank take the home on their schedule and on their timeline, you may be in for quite a ride.

Most banks are so backed up with delinquencies, pre-foreclosures, short sales and foreclosure proceedings that this process can be dragged out for up to 2 years in some cases. The problem with allowing the bank to dictate the foreclosure process is that you postpone your recovery for possibly years.

The time you have to wait before buying again after foreclosure does not start until after the deed of trust transfers from you back to the bank, or the new owner in the case of a short sale.

Deed in Lieu of Foreclosure

A deed in lieu is a foreclosure alternative that puts the timeline and control over the process in your hands. This is an incredibly empowering option for more reasons than just expediting the recovery process.

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Many lenders will actually pay you to cooperate and speed up the foreclosure process. This is also known as cash for keys.  Cash for keys will help you pay moving costs in exchange for leaving the home in good condition when you leave.

Short Sale

When the lender allows you to sell the home for less than what is owed, that is a short sale. This is entirely a personal choice by a home owner.

The short sale process will give you more time than a deed in lieu of foreclosure, and more control over the process than a foreclosure.

All three of these options are treated as the same thing when trying to buy again.

All three options have different tax liabilities (consult an accountant or tax planner). You can buy again using a FHA loan in 36 months, 3 years from the date that the home transfers from your name to the new owner – whether it’s a bank or a buyer of your short sale.

  • Foreclosure is unpredictable, can take an extremely long time and gives you no control over the process.
  • Deed in Lieu gives you control over the time-line and process, and very likely will pay you to move.
  • Short sale gives you some control over the time-line, and most often, will give you more time.

All three options trigger the exact same recovery period. Some options allow you to recover quicker than others.

If you have any questions about any of these options, please feel free email or ask a question below.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Jess says:

    In the short sale situation under Califirnia law the first and second will be cleared out as full payment and you will not get a 1099(?) for the forgiven debt from the IRS, correct? Does the same thing occur witrh deed in lieu of foreclosure?

  • Mharly says:

    Hi Scott,
    Thanks for sharing all of your great knowledge to people that are worried about losing their homes or in bk or foreclosure…
    I filed chapter 7 in nov. 2011 and should get my discharge in march 2012. When the automatic stay is lifted next year, should I short sale my house or foreclose. We want to stay in our home till June or July 2012 if possible. I was told by a HUD rep. that it would take 4 months or longer for lender to boot us out after sale date. Will a lender approved short sale prolong our stay? Any info. Would be great.. Again thanks for all your informative knowledge

    • Mharly,
      If you in a position where you know with almost absolute certainty that you will be unable to afford your home, then Yes, a short sale or deed in lieu of foreclosure is going to at least give you some control over the process. I also recommend that you make your payments on-time during this period. Start by going to your lender’s website and look for information about their deed in lieu of foreclosure (cash for keys) or foreclosure alternatives programs and guidance.

      With either a deed in lieu or a short sale, at least you will have some control over the process – far too often I see folks just “walk away” and allow the bank to foreclose on when they get around to it – this is taking 2-3 years or more in some cases, which ultimately just pushes your recovery time out another 2-3 years.

      Does that help?

  • linda says:

    Hello! I have two questions. Is a person required to pay City and County Property Taxes for home Discharged in Chapter 7 but, not yet Foreclosed on. Also still living in the home until stay is lifted. Question 2: What are the difference of tax liabilities for Foreclosure/short sale/ deed in lieu of foreclosure. Memphis, TN.

    • Hi Linda,

      Ok, first question. Bankruptcy does not “pay off” your home, it simply protects you against a deficiency judgment should you default on the mortgage at some point in the future. Unless you transfer title to the bank, or to a buyer through a short sale, you are still the legal owner and therefore responsible for all property taxes and payments due on the home.

      The second question – the Bankruptcy should absolve you of any tax liability that could result from a foreclosure, short sale or deed in lieu – all three are treated the say way in terms of impact on your credit/tax liability.