Giving up property on which payments are behind

You wish to surrender, or cannot afford to keep, your mobile home, house or other real estate. Be aware that there may be other consequences to “giving up” your property. You may owe the lender or lenders (if more than one mortgage) substantial amounts of money even after foreclosure. This is known as a “deficiency claim” or debt.

Two other options that may be available to you when you need to give up property are a "short sale" or a "deed in lieu of foreclosure."

Short Sale:

A short sale is when you sell your property for less than the amount you owe to your lenders. This usually happens when property values drop, or when too much money has been loaned on a home. Keep in mind that just because you want to do a short sale does not mean you will be able to do so! First, you must get an offer to purchase, then it is up to your lender to decide if the lender wants to take less than the full amount of the loan pay-off. If you have more than one loan against your home, and they are with different companies, a short sale must pay the first priority loans in full, and at least offer a partial payment to the lowest priority loan in order to be considered. If you are not in a bankruptcy or otherwise insolvent at the time of a short sale, you may experience tax consequences related to forgiveness of debt.

Be certain that you have all terms in writing, including how the lender will report your debt. As part of your negotiation, you can request that the lender report it as "paid as agreed" (if that's true) and "settled in full." Get a written guarantee that the lender taking less than its full amount will not try to collect any deficiency balance from you or assert a tax liability against you for forgiveness of debt. A short sale is one way of avoiding foreclosure. Be realistic about the amount of time you will need to put into getting and offer and asking your lender to take a short sale, because in some cases the homeowner's time is better spent looking for another place to live, additional income, etc.

Deed in Lieu of Foreclosure or "Deed in Lieu":

"In lieu" is a French phrase that means "instead of." A deed in lieu of foreclosure means that you deed your property back to the lender instead of making the lender spend time and money on foreclosure proceedings. Whether or not the lender will allow you to do this depends on the lender and whether they have already had to expend money related to a foreclosure action against you.

Again, be sure that you have all terms in writing, including how the lender will report your debt. As part of your negotiation, you can request that they report it as "paid as agreed" (if that's true) and "settled in full." Get a written promise that the lender will not try to collect any deficiency balance from you and that the lender won't try to assert tax liability against you for any forgiveness of debt.

Experts disagree about whether a deed in lieu is less harmful to your future credit than a foreclosure, but if you negotiate terms regarding the future reporting, it should help you.