Short Sale vs. Deed-in-Lieu of Foreclosure

In my most recent post, we compared the merits of pursuing a short sale against suffering a foreclosure.  After establishing the guiding principle that foreclosures should be avoided whenever possible, we discussed a few of the advantages of a short sale.  But how does a deed-in-lieu of foreclosure fit in with all of this?  Obviously, a deed-in-lieu is better than a foreclosure from the mortgagee’s perspective, but how does it stack up against a short sale?

No Clear-Cut Answer

It was easy to resolve the foreclosure vs. short sale question because foreclosures are, generally speaking, a worst case scenario.  As such, a blanket conclusion supporting short sales was easy to reach.  That’s not the case when looking at the short sale vs. deed-in-lieu issue.  There are strong arguments for both and the right answer can be very context-specific.

Differences of Opinion

Let’s look at what various folks are saying about the two options and how they compare with one another.  These perspectives may provide you with an idea of whether one should prefer a short sale or a deed-in-lieu for a specific set of circumstances.  None of these sources or their statements should be considered a definitive source, as the wide ranging differences of opinion will undoubtedly demonstrate the lack of a certain answer suitable for everyone.

DebtKid.com compares the two options and sees them as near-equals.  The site recognizes that deeds-in-lieu are  the faster option, but reminds us of the risk of a deficiency judgment.

Lending Tree provides a similar assessment.  A deed-in-lieu offers more convenience, buy may involve greater risk.  Additionally, the site reminds us that lender cooperation is necessary for either option to work.

Upside Down Real Estate doesn’t reach a definitive conclusion on the matter, but it does remind us to carefully consider the tax ramifications.  It also cautions anyone who uses a deed-in-lieu to read the fine print–some lenders may try to reserve the right to foreclose in order to “clean up” title.  That’s something you don’t want to sign off on!

Bills.com observes that some lenders will be more likely to accept short sales than deeds-in-lieu because short sales don’t require them to ever take title to the property.  Many lenders don’t want these properties to show up on their books, which can make it hard to successfully pull off a deed-in-lieu.

Richard Geller considers short sales to be the winner of the short sale vs. deed-in-liue contest.  He describes the short sale as a way of “fixing the problem for yourself and for the mortgage company.”  However, Geller’s assessment of one’s ability to secure financing for another home in the wake of a short sales appears to be overly optimistic.

MortgageReliefFormula also comes down on the side of short sales.  The site argues that lenders are less likely to accept deeds-in-lieu due to clean title concerns and that there’s no appreciable credit score benefit to either approach.

Conclusions

Overall, the deed-in-lieu approach wins in terms of speed and ease.  However, it looks as though short sales ahve a greater likelihood of approval and that the provide greater protection to the buyer.  There’s an ongoing debate about the impact of either option on one’s credit score, with no clear consensus readily apparent.

The bottom line in the short sale vs. deed-in-lieu debate is that the mortgagee really needs to consider all relevant factors specific to his or her individual situation in order to make the best possible decision. One’s surrounding circumstances can play a huge role in making the right choice.

Short Sale vs. Foreclosure:

We’ve recently discussed home foreclosures and the various alternatives to “walking away” from one’s home, including short sales.  It seems reasonable to compare the short sales and foreclosures directly.  Which is the superior option for the homeowner who isn’t going to be able to make the required payments on his or hre property and for whom mortgage restructuring just isn’t possible>

Overall, short sales are a better option.

The Guiding Principle

The short sale vs. foreclosure controversy should be informed by one core principle:  A foreclosure is the option of last resort.  Everything, including a short sale, is preferable to a foreclosure.  As DebtKid.com explains:

The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

So, the contest is easy to resolve.  In the war of short sale vs. foreclosure, the short sale wins.  The real qeustion is why and by how much.

The Credit Score Situation

Many people believe that pursuing and closing a short sale will be better for their credit score than a bankruptcy.  In fact, it’s not hard to find numerous people advocating the idea one can better protect his or her credit with a short sale.  While I do recommend shot selling over foreclosures, people should know that the credit score issue isn’t nearly as significant as some poeple make it out to be.

The Wall Street Journal recently ran an article that was based, in large measure, on a conversation with Craig Watts, a spokesperson for Fair Isaac==the very people behind the FICO credit score.  The article explains:

Although a short sale, where the lender agrees to take less than owed on the mortgage, will drop your FICO score as much as a foreclosure will, there is one advantage to it: You may be eligible to buy a home with an institutional loan backed by Fannie Mae or Freddie Mac more quickly than you would if it went into foreclosure.

[emphasis mine]

In other words, the actual damage to your credit score is about the same with either options. The aforementioned article does raise a real advantage to short-selling, though.

Buying Another Home

Those who short sell instead of allowing foreclosure usually do have the opportunity to purchase a different home earlier than those who go through bankruptcy.  That might not make much a difference in the short-term, but everyone’s financial situations have a tendency to change and they can sometimes change quickly.  You don’t want to miss an ideal property at a price you afford if you can avoid it.

Other Reasons to Prefer Short Sale

You may be able to negotiate your move date with a short sale, something you can’t always manage with a foreclosure.  You can honestly fill out loan applications stating that you sold your residence instead of admitting to a failure to meet the terms of your mortgage.  As alluded to in the earlier quotation from DebtKid.com, short sales also decrease the likelihood of being forced to confront arrearages and costs related to the foreclosure.

Overall, the short sale wins the short sale vs. foreclosure contest easily.  If you’re forced to choose between the two, pursue the short sale and don’t surrender in the face of foreclosure.

Recently, we’ve been providing some background on exchange traded funds.  We’ve talked about Proshares, gold ETFs and oil ETFs.  Now, were going to discuss iShares, which is the market leader in the field.  Here’s a little background about iShares’ history and why it stands out in the ETF world.

Banking and finance conglomerate Barclay’s used to own iShares.  Under its auspices, iShares grew to be the biggest player in the ETF world, offering over 400 different funds ranging from wide-ranging market index offerings to narrow niche-specific options.

In 2009, Barclay’s decided to raise cash in the face of the banking crisis by selling off the highly successful iShares unit.  At the time, experts thought that Vanguard, Charles Schwab or Northern Trust might buy iShares.  In something of a surprise, they instead announced plans to sell to CVC Capital Partners for over $4 billion.  However, during a 45-day period in which Barclays’ was allowed to shop iShares before the deal was finalized, BlackRock –a New York based financial management company–came up with a $13.5 billion offer for iShares and its parent unit.  In June of 2009, iShares officially became part of BlackRock.

The change in ownership hasn’t seemed to hurt iShares.  Even though the ETF field is growing increasingly competitive, iShares managed a significant increase in the total of assets under its management.  According to the Financial Times:

According to figures from BlackRock, assets under management for global ETFs reached $1,032bn (£639bn, €734bn) at the end of December, some 5 per cent above the previous all time high of $982bn registered just a month earlier. European ETFs also fared well, registering a record high of $223bn last year.

That boost put slightly over 50% of all EFT assets in the US under iShares management, an increase of around 4% for the year.

Why is iShares continuing to gain so much ground even in a market that’s exploding with new funds?  According to a recent Wall Street Journal analysis, much of it is the natural advantage of being an established player.  Most ETFs are index funds.  Their returns are easy to understand and they can be remarkably similar.  That makes it harder for new ETFs to distinguish themselves from the rest of the pack.  Additionally, ETFs are traded just like stocks, which means investors are attracted to funds that are established and that have high trading volume, which makes selling a quicker proposition. established funds with heavy trading volume—thus they know they will always be able to sell quickly and cheaply. That puts new players at a disadvantage.

The advantages of being the “king of the hill” are undeniable, but iShares also continues to attract investors because if offers such a wide range of funds.

over 400 funds globally across equities, fixed income and commodities, which trade on 16 exchanges worldwide.  A CNN/Money report noted that iShares runs over 400 different funds–across commodity, fixed income and equity types–that are traded on 16 different markets around the world.

Honesty.  Transparency.  Purity.  Tax and Cost-Efficiency:  Those are what iShares lists as the underlying principles governing their approach to business.  I’m sure they’d credit a commitment to those ideals a key component to their success, as well.

Regardless if the causes, the results are clear.  BlackRock’s iShares is continuing to gain popularity within the exchange traded fund world.  They’re well known, respected, experienced and offer a huge number of fund options for investors.  Anyone who is considering getting actively involved with ETFs should carefully consider iShares funds.  There’s no such thing as a sure thing in the world of investing, obviously.  However, it seems sensible to believe that a company who currently hols more than half of the US market is doing something right.

Wondering about a deed in lieu of foreclosure?

Real property foreclosures are still front page news.  The pace of foreclosures may be slowing a bit, but there’s no doubt that we’re going to continue to see a historically disproportionate number of property owners who are unable to meet the requirements of their mortgages in 2010.  There are those who barely managed to survive ARM resets in 2008 and 2009 who are approaching the end of their ropes.  Then, there are those who are struggling with prolonged periods of unemployment thanks to our record unemployment levels.

No one wants a foreclosure.  Even if you divorce the matter from issues of personal pride and the strong desire to experience the home-owning element of the American dream, foreclosures are a rotten prospect.  They’re stressful and they can gut your credit like a professional fishing guide attacking a walleye with an electric knife.

That’s why so many people are interested in finding alternatives to foreclosure when it becomes clear that they’re not going to find a way to meet the requirements of their loan and discover that they’re not able to refinance or engage in some kind of productive mortgage renegotiation.  The deed in lieu of foreclosure is one option.

What is a deed in lieu, anyway?

In a traditional foreclosure, the lender (usually the bank) eventually reaches their wits’ end with the homeowner who is unable to make his or her payments.  The bank opts to legally assert ownership of the property in hopes that they may sell it it as a way of recouping some or all of the moneys advanced on the loan.  Foreclosure is a carefully governed legal process.  It’s time consuming and it can cost lenders a great deal of money.  One estimate maintains that it can cost a lender between $40,000 and $90,000  to foreclose on a property.

This creates an incentive to find a more efficient solution to the problem.  That’s what the deed in lieu of foreclosure represents.  HUD defines a deed in lieu (DIL) like this:

A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.

In simple terms, it basically means that the defaulting home owner voluntarily relinquishes ownership of the property to the bank instead of forcing the prolonged legal process of foreclosure.

Why would a homeowner consider a DIL?

It’s easy to see why a lender might be receptive to the deed in lieu.  They don’t need to follow through on the foreclosure process and they save time and resources in the process.  Why would the defaulting homeowner be interested, though?

There are a few reasons.

One is efficiency.  There’s a benefit to biting the bullet and getting things resolved quickly instead of letting them linter.

The second is credit rating protection.  A DIL will punch your FICO in the stomach, but it won’t deliver the knockout punch of a foreclosure.

Finally, a deed in lieu offers some additional flexibility.  One may be able to negotiate renting the property on an interim basis, securing the time necessary to find alternate housing and to move and other benefits to which one won’t usually have access during a foreclosure.

More than sending your keys to the bank…

A DIL is simpler than a foreclosure, but you can’t just mail your house keys to the bank with a note that says, “Take it, it’s all yours, Mr. Moneybags!”

A deed in lieu is a legal process and the right paperwork must be completed.  Additionally, not everyone who may be otherwise facing foreclosure will automatically qualify for the option.  Some lenders don’t like the idea, because it leaves them vulnerable to junior leans in ways that a foreclosure does not. Additionally, the lender may have special requirements for a deed in lieu:

Typically your Mortgage Company will require that your home has been listed with a Real Estate Agent for at least 30 days and there are no other liens on the property for them to approve you. Some Companies may also require that the property be vacant, an interior appraisal of the property and a minimum of 60 days prior to a Foreclosure sale.

A deed in lieu isn’t a solution for foreclosure, it’s an alternative.  It has advantages to both parties, but it isn’t always easy to arrange.

Travel rewards credit cards are another popular option. Right up there with the rewards credit cards and the cash back credit cards, travel rewards cards has to be a hugely popular category. In the top three I’m pretty sure. I’m going to give you some valuable insight into these cards with the rest of this article. I hope you enjoy it. I’ve used travel credit cards for many years. I love them and if I was only allowed to choose 2 credit cards that I could have, then a travel rewards card would certainly be one of them.

You’ve seen as the economy is taking a dive lately that the price of airline tickets is coming down too. This is great news if you can afford to travel. And if you have been using a travel rewards credit card for some time then you are well aware of the benefits that these cards offer. The great thing about travel cards is that it doesn’t matter if a ticket goes through the roof, most of them are based on actual air miles and so as long as you have enough air miles you’re good to go.

However this is not always the case, and you need to read the fine print. Just because a credit card talks about air miles or travel miles, does not necessarily mean that 1000 miles equates to actual air travel miles. It might equate to a cash value of around $100 or it might be an actual travel mile but a fraction of what you actually have.

You could end up sitting next to the dupe who paid thousands of his or her hard earned money to get to the same place that you’re getting to for free.

Travel rewards credit cards have come a long way, and this is great for us as consumers. A lot of the airlines have joined forces and alliances so that you are no longer stuck with just one airline. This is hugely beneficial.

The best known of the travel rewards cards is the air miles. And all of the major credit card companies carry a version of this card. But there are others to choose from. And as I keep telling you, you need to research and figure out your own needs before you sign up for any credit card but especially a travel rewards card.

Travel rewards credit cards are obviously a fine choice for the frequent traveler, and many travel rewards cards give bonuses on other aspects of travel not just the flight. You’ll find with some of the best credit cards out there that you’ll get great discounts on hotel rooms. And many of these travel rewards credit cards actually excel at offering decent hotel rates and car rental rates too.

In fact it is important to determine if the travel rewards credit card that you are getting is an airline based card or is it more of a hotel based credit card. Most folks automatically assume that a travel rewards card is airline based, but just as often they can be affiliated with a hotel or car rental company too.

The benefit of an airline travel card is that you will get access more often to several airlines. This is where these cards differ from airline rewards credit cards. But if you are more interested in getting great rates on car rentals or hotel stays be sure to choose a travel rewards credit card that is geared more to that industry. This is where you need to spend your time beforehand determining what your specific needs are.

Travel rewards credit cards are geared towards the jet set traveler. You know who you are. But even for those of us who don’t travel as much as we’d like, a travel rewards card can be a great addition to our arsenal. The benefits can be well worth it.

But it is important to understand that travel rewards credit cards come in basically two flavors. Those that are more focused on giving you great deals for airplane tickets and those that are focused more on the other aspects of travel such as hotels and car rentals. So be sure you know which ones you are most in need of and choose the right set up for you. Either kind can be a great addition to your travel plans, but be sure to research ahead of time so you know what it is you’re getting into.

Travel rewards credit cards continued…

Prepaid credit cards have their uses just like any of the categories of the credit cards that are out there. I’ve used these credit cards myself and I’ve given them as gifts. I liken them to gift cards and I’ll explain why a little later on. Most of the major credit card companies offer prepaid cards and you might be wondering why if there isn’t any interest to be charged to you. What’s in it for them? Plenty as you will see soon enough.

You might be wondering why someone would choose to get a prepaid credit card and the answer could be for any number of reasons. Most often a prepaid credit card is used if accessing an unsecured credit card is too difficult. In today’s society not everyone is able to gain access to a regular credit card. And yet it is becoming increasingly more difficult to go about daily living without a credit card of some sort.

Ever tried to access a rental car or book a hotel room? And these are common events for even the most cloistered of us in today’s world. Bottom line is that you need to have some sort of credit card to find your way around modern society. But if your credit is in the gutter then it can be hard to get a regular credit card.

In addition, prepaid credit cards are a great way to have a single source of funds at your disposal. Some folks don’t want or can’t afford a regular checking account. And with a prepaid credit card you can have your paycheck direct deposited onto the prepaid credit card. And most of these prepaid cards also allow for bill payments, so you really don’t need a banking account if this is your choice. I knew a guy like this who just had a prepaid credit card and used it for everything. The great thing that he liked about it was that he would never get dinged interest and late payment charges.

And this friend of mine was a man of small means. So each month he’d top up his card and then empty it out as the month went by. The fee for the prepaid credit card was less he figured than having a checking account. His landlord charged his rent to the card. In addition there are hardly any places around that don’t take credit cards nowadays, and he’d been using it for months and never had a problem with not being able to buy what he wanted.

But like with all cards you should search around for the right one for you. Prepaid credit cards are just like the others and they come in all shapes and sizes. One of the big benefits of a prepaid card over a secured credit card is that you don’t have to come up with the minimum amount of $500 that secured credit cards require from you. This can be a plus if you want one now but only have a hundred bucks or so.

Some of them are free and some have fees associated to them and others will wave the fee if you have your paycheck direct deposited onto the prepaid card.

I personally like to give them as gifts to my nieces and nephews at Christmas time. They love it because it makes them feel all grown up when mom or dad takes them out shopping and they get asked how would they like to pay and they say credit. Additionally I really think they are learning some valuable lessons about the use of credit even if a prepaid credit card is used more like a debit card. It helps teach them financial responsibility which I don’t think can ever be flogged too much.

Prepaid credit cards are a great option if you want the comfort and security of a credit card without the problems of late fees and interest rates. I’ve used these credit cards often for a variety of purchases and I find that they work just like regular credit cards. I also like to give them as gifts to loved ones for birthdays and Christmas. And I love receiving them in return. Nothing is worse than having to return a gift because Aunt Mildred got me a pink sweater that’s as tight as Uncle George’s socks.

Prepaid credit cards can work just like gift cards and I love that. And if you don’t have good enough credit for a regular credit card or you don’t trust yourself with paying the balance off each month, then you should consider a prepaid card.

Prepaid credit cards continued…

The banks know that even in these times of economic uncertainty, job losses, and rampant financial difficulties, there is still a great need for credit tools to be available to people who might have a less than stellar credit history or for those who are just establishing their credit.

Secured credit cards are the banks answer to this growing market need. Having access to credit cards, means that people can book travel arrangements, rent cars, and hotel rooms, etc. without a credit card, many of these regular activities are either difficult or impossible to do. The card doesn’t just provide purchasing power, but it also provides freedom of choice and movement to people in these situations.

Secured credit cards may or may not come with an annual fee attached, and the interest rates charged on outstanding balances can vary somewhat, so it pays to do your homework. The range of interest rates that are typically available on secured credit cards are from 9.99% all the way up to 19.5%. If an annual fee is charged, it is generally between $50-$60. That fee would be on top of other requirements such as the deposit.

When comparing the interest rates on various cards, pay special attention to the fine print. Many people have got caught with an interest rate they thought was their permanent rate, only to find out later on it was only for the first few months, and then the rate went up substantially after that. It is also worth noting that a number of these credit cards do not require a minimum income or previous credit history from the applicant. In some cases, the lending institution may not even check your employment history or credit score.

With secured credit cards, there may be certain limitations attached such as a lifetime credit limit, no protection in the event of fraud, and deposits are sometimes required. In those instances, the lending institution may only allow credit to be granted to the extent of a deposit made. Generally speaking, credit limit increases will also only be allowed up to a certain point. However, credit limits can range quite widely, for example some have $5000 limits, some have $10,000 limits, all the way up to $25,000.

The great news about secured credit cards is that some of them are offering additional services such as travel accident insurance, FDIC insurance, the ability to make an emergency transfer of cash, and auto rental options. Certain cards that require you to make a deposit before you can be granted credit, may pay you interest on that deposit.

Unlike in the past when secured credit cards came with no additional features, there are even cards that offer rewards programs for airlines and hotels, and rebates on the booking of travel condos. There is even a new feature being offered by Visa that is what they call a “credit-on- demand” program, which may provide up to $25,000 of available credit. Secured credit cards now more than ever, are offering competitive features, which makes doing your own research on them very important.

Certain types of secured cards will guarantee your application will be approved, again regardless of your employment, income, or past credit history. These types of cards are usually accepted anywhere unsecured credit cards are, making them a valuable financial tool for people who may have limited options otherwise.

Now that you know all of the great options and benefits that secured credit cards can offer, you don’t have to allow your poor credit history or lack of a financial track record to be a barrier to your purchasing, travel, or other credit needs. You can enjoy the freedom a credit card can provide and be confident in knowing that your past financial options are now much wider. Browse the various options to choose the card that is right for you.