Will a New Rule Let You Walk Away From Your Mortgage? - A new rule that goes into effect on March 1st is set to dramatically change the way delinquent home loans are handled, and in essence, will allow some homeowners to walk away from their mortgage without going into foreclosure.
What is it?
The new rule applies to homeowners who are underwater on their mortgages – but can’t solve the problem through a loan modification or short sale. Instead, Freddie Mac and Fannie Mae have written a new escape clause into mortgage servicing regulations that allows servicers to approve deed-in-lieu of foreclosure for some borrowers.
What exactly does that mean?
A deed-in-lieu is an option where the lender takes over possession and ownership of the home without a foreclosure. It’s better for the lender because there’s less paperwork involved. It’s also better for the borrower. Yes, they’ll still lose their home, but they won’t have to deal with having a foreclosure on their credit report.
Here’s how it works:
The new program will be available to all borrowers, regardless of their delinquency status, but it seems targeted at those who do not qualify for the similar deed-in-lieu option available under the Home Affordable Foreclosure Alternative (HAFA) program. In order to be eligible for the HAFA program, a homeowner must be more than 90 days delinquent on their loan. However, this new rule allows borrowers who are current or less than 90 days behind on their mortgage to have some options. If a borrower is current on their loan – or maybe just a month or two behind on the payments – then suffers something unforeseen (like the death of a spouse or a serious illness), they might not be able to afford their home mortgage anymore. So, what can they do? Where can they go for help?
That's where this new rule comes into play.
Of course, there's tons of red tape, but that is designed to ensure that servicers follow all of the rules and regulations before granting a deed-in-lieu.
First, the borrower must provide documentation proving the new financial hardship, and must also provide evidence that they can no longer afford their mortgage. At that point, a servicer must complete an evaluation of all foreclosure alternatives. In other words, they must offer the borrower a loan modification or forebearance, or encourage a short sale before offering the deed-in-lieu option.
If none of those options are feasible, the servicer can proceed to the next step in the process – a deed-in-lieu.
There are other stipulations and guidelines that apply, depending on how delinquent the borrower is on their home loan. For example, if the homeowner is less than 31 days behind on their payments, the servicer must check financial records of the borrowers to make sure that their debt-to-income ratio is higher than 55%. All of these steps are in place to ensure that the deed-in-lieu really is the final and only remaining option for the homeowner.
At that point, the borrower must vacate the premises and turn over the keys to the servicer. The servicer is then required to do an interior property inspection no more than 48 hours before the final execution of the deed. They must make sure that borrower has moved out and taken all of their personal property with them, and left the home undamaged and in broom clean condition. If that's the case, the servicer has the authority to offer up to $3,000 in relocation assistance to borrower to move into a new home.
However, if the borrower damaged the seized home before moving out, didn't clean it, or left some of their personal property behind, the cost for cleaning and repairs is deducted from the relocation assistance amount. While a deed-in-lieu isn't ideal, it is a better option than foreclosure for all delinquent borrowers, and thanks to this rule, experts expect more homeowners to choose this option when it is presented to them in the future.
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