Fannie Mae and Freddie Mac recently announced new rules for deeds-in-lieu of foreclosure. The new rules will become effective on March 1, 2013. A deed-in-lieu of foreclosure allows a borrower to convey all interest in a real property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.
The principal advantage to the borrower is that it immediately releases him or her from most or all of the personal indebtedness associated with the home. Another benefit to the borrower is that it hurts his or her credit less than a foreclosure does.
Due to the decline in the housing market, many homeowners have been stuck in homes that are worth much less than they owe. The new rules for deed-in-lieu transactions will assist many homeowners who no longer wish to remain in their homes.
The new rules apply to people who are current or less than 90 days late on their mortgage payments. To be eligible for the deed-in-lieu programs, borrowers are required to have a 55 percent debt-to-income ratio, which means that 55 percent of their monthly gross income goes to paying the debt and must also document a hardship, such as illness or a spouse’s death. The home must be clean and not damaged.
Homeowners may also have to surrender as much as twenty percent of personal assets, excluding retirement accounts, to partially meet the loan’s unpaid balance, depending on the borrower’s financial situation. The program does not affect second mortgages. Mortgage servicers can
offer up to $6,000 for second-lien holder to release borrowers from the loans, but there’s no requirement that the holders agree.
The new programs are separate from the government’s Making Home Affordable foreclosure- prevention efforts that require homeowners to be in or near default. The Fannie Mae and Freddie Mac programs do not require borrowers to be turned down for a modification before applying, as does the Treasury-run Home Affordable Foreclosure Alternative program, or HAFA.