I Want to Give up my House. What is Best for my Credit: Foreclosure, Short Sale or Deed-in-Lieu of Foreclosure?

Take a look about this article:  http://tinyurl.com/3jldp3v.  The columnist, Michelle Singeltary, from the Washington Post recently wrote about this common question. So many of my clients ask me the same question.

Surrendering your home by foreclosure means allowing the bank to go to court and follow foreclosure procedures to get the house back.  The bank’s attorneys go to court to do the foreclosing, not you, and it can take 6 months to 1 year in Illinois.  In other states, it can be quicker than that. By definition, a “short” sale is where a bank or mortgage lender voluntarily takes less than what is owed on the mortgage.  A “Deed in Lieu” is where you give the house back to the bank by agreement, and sign a deed to give the house back to the bank right away, rather than making them go through the whole foreclosure process.

There are many things that factor into your credit score.  It boils down to this:  Each way of surrendering a home will affect your credit roughly the same amount.  So, Singletary says, don’t sweat it: “At least now you know that if you decide you can’t keep your house, you don’t have to fret that one way to turn in your keys is far worse than the other. So just weigh what’s best for your overall situation and not only the impact to your credit score, …The FICO score is only one part of anyone’s credit profile and reputation.”  All of them show a negative payment history, and will affect your credit negatively.  While there may be a slight difference in how future lenders will view the situation, your credit will take about an equal dip regardless of how you give up your house.

What really matters is what solution is best for you and your family.  If you are considering giving up your house because you can’t afford it, you should consult with an experienced bankruptcy attorney.

There are so many different consequences, not just your credit score, that affect the decision, that you need to review all of your options before making a decision.  If you contact a realtor, of course, the realtor would want to get a sale, and get the commission. But, the discussion doesn’t end there.  In many cases, selling a house “short” has other consequences. But, the lender can still charge you with the difference.  Or, if the lender “forgives” the balance, they will submit a 1099 to the IRS at the end of the year, and you may have to pay income taxes on the amount forgiven.

Also, if you have other debts, a bankruptcy could be the best solution, which would allow you to give up the home, and, in turn, owe nothing further on the mortgage, and on the other debts, such as credit card bills.

Bottom line: If you can no longer afford to keep your house, before you make the decision on how to give it up, talk to an experienced attorney to help you decide which way is best for you, not just your credit score.

Daniel J. Winter

Law Offices of Daniel J. Winter

53 W. Jackson Boulevard, Suite 725

Chicago, IL 60604