• Some homeowners who are having problems making their mortgage payments may think that a deed-in-lieu of foreclosure – in which the lender agrees to take back the keys and let the homeowner walk away – is better than spending the time trying to do a short sale. This may seem even more appealing to homeowners because with a deed-in-lieu, the owners potentially can receive a few months of free rent.
  • Although Fannie Mae and Freddie Mac recently updated their guidelines for deeds-in-lieu of foreclosures and now allow homeowners with hardships to live in their homes for up to three months without making mortgage payments, lenders rarely approve these transactions.
  • A primary reason lenders are reluctant to approve deeds-in-lieu is that California allows non-judicial foreclosures, meaning the property is foreclosed through a trustee’s sale rather than the relatively lengthy judicial foreclosure process required in other states.
  • Additionally, lenders only approve deed-in-lieu transactions if there is a single loan on the property or multiple loans with the same lender, which also greatly limits their usefulness, according to one broker. This makes doing a short sale a better option.
  • With a deed-in-lieu, striking a deal with a first, purchase-money lien holder does not automatically get the homeowner off the hook when it comes to second or other junior loans.
  • By contrast, in a short sale, all lenders must sign off, and California law requires them to forgive any remaining balance after the sale.
  • Finally, in a deed-in-lieu agreement, a lender can request additional cash contributions be made by the homeowner, which are illegal in a short sale.