Is mortgage foreclosure staring you in the face? When mortgage problems crop up, and depending on your situation, you may have a choice of solutions to save your home or exit as gracefully as possible.
- As we saw during the COVID-19 pandemic, homeowners experiencing temporary shortfalls may be eligible for mortgage forbearance from their lender and allowed to skip payments for a time.
- For others whose mortgage has become unaffordable, a loan modification such as Fannie and Freddie's Flex Modification could be the answer.
- For non-conforming loans, lenders may also offer proprietary loan modifications, where terms may be tailored to fit your situation.
- While currently "paused", Fannie Mae and Freddie Mac for a time offered streamline refinance programs for borrowers who had little or no equity in their properties. Fannie Mae called their program "High LTV Refinance Option", and Freddie Mac "Enhanced Relief Refinance Mortgage". In 2021, these were "temporarily paused"; Fannie Mae said that "Due to the low volume and the impact of the Revised QM Rule, we are temporarily pausing the acquisition of high LTV refinance loans" and Freddie Mac issued a similar statement. When they were available (and may again be) these programs may allow you to get a better mortgage rate, even if you owe more on your mortgage than your property is worth.
Unfortunately, if your problem is more permanent than temporary, due to ongoing unemployment, a medical injury, or other major long-term financial roadblock, these programs won't help -- you have to have a sufficient and stable source of income to qualify for any of them. As difficult as it may be, sometimes, you have to let the house go.
If the value of the home will support it (or if you have at least some equity in the home) you can of course sell it, pay off what you owe and move on. If not, and if you are (or likely to be) falling behind on payments, you will need to consider other options.
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is a voluntary alternative to a foreclosure proceeding. It requires that you give up your rights to the property and sign it over to your lender, which releases you from your mortgage obligation. Because it takes place outside the court system, it is a less expensive way out than a traditional foreclosure proceeding.
Why Would a Lender Accept a Deed In Lieu of Foreclosure?
Lenders are most likely to agree to a deed in lieu of foreclosure if the following is true:
- Your mortgage balance exceeds your property's value.
- You live in a state where the lender cannot come after any of your other assets, such as California, or you don't have accounts that could be seized.
- The deed-in-lieu of foreclosure is the least costly option for the lender to take title to the property.
If you have considerable equity in your home, your lender or servicer could foreclose, sell your property, and recover most or all of the balance on the mortgage -- plus the costs of foreclosure. If that's not the case, and the sale of the home does not cover the loan, the lender could sue you for any shortfall after the foreclosure sale. If the lender thinks he can recover more of his loss by tapping your other assets, it is unlikely that he would accept a deed in lieu of foreclosure, since this would ensure a loss on the transaction.
However, when there is little or no chance of recouping the costs and loan balance by foreclosing, the lender may accept a deed in lieu of foreclosure. Your lender may first require that you try to sell your home; most lenders would rather have you sell the house than have to sell it themselves, even if this results in a "short sale", where the lender realizes a loss. Since that also doesn't involve the courts, it may go much faster and less expensively than a foreclosure. It's worth noting that FHA-backed loans have special rules, and if you meet HUD's guidelines, your FHA lender will accept your offer of a deed in lieu of foreclosure.
Avoiding Foreclosure: A Better Outcome
One advantage to a deed-in-lieu settlement is that on your credit report, a deed-in-lieu isn't quite as detrimental as a foreclosure. In addition, if forced to foreclose, your lender will likely try to pass the high legal costs of that process on to you. You could be forced to surrender other assets to your lender if you owe more than the property fetches in a foreclosure sale. Finally, a deed-in-lieu is negotiable. You may be able to get concessions from your lender for not dragging out a foreclosure proceeding -- concessions like a more favorable report to credit bureaus.
Negotiation of a Deed-in-Lieu of Foreclosure
A deed-in-lieu of foreclosure is voluntary, and that means there is room for negotiation. You should have a real estate attorney represent you. Skilled negotiation is critical -- if you make a mistake, you could end up with the lender chasing after you for fees and deficiencies, in addition to a getting a full-blown foreclosure mark on your credit history. For you, the best possible outcome would be a complete walk-away with your credit report showing "paid-satisfactory" or at least "paid-settlement." The lender's representatives may argue that they can't do this, but in fact they can.
Depending on the circumstance, a lender may offer you some help with moving and relocation costs, too. These so-called "cash for keys" arrangements see you agree to maintain the property until you vacate the home on or by a specific date, and leave it in "broom clean" condition, just as you would if you had sold the property. The amount of funds offered in such deals varies, of course.
Fannie Mae actually has a formal program for deed-in-lieu transactions called "Mortgage Release". While the information is aimed at loan servicers, you can see Fannie Mae's deed-in-lieu guidelines and eligibility requirements in their seller-servicer guide. Freddie Mac has a deed-in-lieu summary outline and there are links to their technical guidelines there as well.
Of course, your loan will need to be owned or backed by Fannie or Freddie to be eligible; see if either owns your loan using Fannie Mae's loan lookup tool or Freddie Mac's version.
The FHFA has a brief guide to other "loss mitigation" programs that should be available to loans owned or backed by the Fannie or Freddie.
For loans not owned or backed by Fannie Mae or Freddie Mac a lender or servicer will have their own guidelines.
What if Your Lender Says No?
Talk to your lender's loss mitigation department about a short sale. This involves selling your home for less than the balance of the mortgage -- ideally, with the lender accepting the proceeds as payment in full. Again, the idea is to keep a foreclosure off your credit report and make a clean break. If your back is truly against the wall, speak to a bankruptcy attorney. In many cases, you can protect certain assets -- like retirement funds -- from lenders suing for any balance which may be due.
This article was revised by Keith Gumbinger.
