What is Pre-foreclosure Sale and a Deed in Lieu of Foreclosure?

When you are faced with the prospect of a foreclosure, you have several options before you. You can pay off the delinquent amount plus fees, if you can afford it, and keep your home. If you cannot afford it, you can allow the home to be foreclosed on by the bank. You can also arrange a short sale of your home in which you and the lender sell the home for less than what is owed on the loan.

You can also do something called selling a deed in lieu of foreclosure. Like a short sale, a deed in lieu of foreclosure helps to avoid the nasty hit to your credit score that results from a foreclosure. A deed in lieu of foreclosure is when the homeowner agrees to surrender the property to the lender. The lender, in turn, agrees to avoid pursuing foreclosure against the homeowner. The lender may also agree to forgive the loan in full.

The difference between the two is that a deed in lieu of foreclosure has the property return to the lender's possession. In a short sale, the lender does not retain ownership of the property; the owner instead remains in possession and sells the property to help pay off the remainder of the loan balance.

Those pursuing a deed in lieu of foreclosure need to be careful and make sure that the bank will actually forgive the deficiency balance on the loan. Some lenders will; some will not. If they do, you may actually be held liable for taxes on the forgiven balance (although there may be tax relief for you from the government).

In short, both of these options are generally preferable to a foreclosure, and can help you avoid taking a painful hit to your credit score.

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