Some homeowners can now walk awayby Michele Lerner
Beginning March 1, 2013, Fannie Mae and Freddie Mac will allow homeowners to apply for a deed-in-lieu of foreclosure even if they have been making on-time payments. Until recently, Fannie and Freddie borrowers were only allowed to engage in a deed-in-lieu if they were 90 days or more delinquent. In some cases, homeowners were even encouraged to stop making mortgage payments–even if they could afford them–in order to qualify.
A deed-in-lieu of foreclosure is when a homeowner who can no longer afford their mortgage voluntarily gives back their home to the bank in exchange for having their mortgage debt wiped clean. While a deed-in-lieu of foreclosure will have a negative impact on your credit score, it can be the fastest way to escape an unsustainable situation.
Do you qualify?
To qualify, current homeowners must prove they are experiencing a hardship such as a job loss, serious illness or death of a co-borrower and must have a debt-to-income ratio of 55 percent or higher. The property must also be in good condition.
“With these changes, borrowers who have certain hardships but are current will be eligible for a mortgage release, also known as a deed-in-lieu of foreclosure,” says Andrew Wilson, director of media and external relations for Fannie Mae. “The reason we made these changes is that we want to have appropriate options available to homeowners who have a hardship or are having difficulty making their mortgage payments.”
Rick Sharga, executive vice president of Carrington Mortgage Holdings in Irvine, Calif., says he doesn’t expect a large number of homeowners to take advantage of the new plan because home prices are beginning to come back in many areas. He says homeowners will have to decide if they want to wait a few years for prices to improve or if they should take a hit to their credit now and move on.
The new policy also offers a new option: In addition to moving out immediately or renting their previous home for up to one year, homeowners can now choose to live in their home rent-free during a three-month transition period.
Sharga says the timing of this announcement seems odd since home prices are rising. According to the National Association of Realtors, median existing-home prices are estimated to have risen 6.3 percent in 2012.
“The idea may be to help the low inventory situation and get these homes on the market,” says Sharga. “When the owners have been making payments and are living in the property they’re likely to be better maintained than a vacant foreclosure.”
Another tool in the toolkit
Sharga says that while he expects relatively few homeowners to take advantage of this program, it does offer the benefit of allowing them to get out of their home without a history of delinquent payments on top of the hit their credit will take from the deed-in-lieu.
“It won’t have a big impact on the housing market but it is one more tool in the toolkit that the government has to help negative equity borrowers,” he says.