I constantly read about distressed homeowners giving one’s property back to the bank and walking away by signing over the deed of the property to their lender. This is achieved through a process called a Deed-in-Lieu of foreclosure, definition from Wikipedia, where the bank allows a homeowner to sign over the legal title to the property as settlement for the existing mortgage on the home. Sound to good to be true, it is and there are many reasons this is not a very used option for solving one’s financial situation for distressed properties.
Firstly, till the recent revision of new deed-in-lieu regulations by Freddie Mac and Fannie Mae, the governments agencies through which more than 90 % of all home mortgages go through, “approvals were rare,” according to Brad German, a spokesman for McLean, Virginia-based Freddie Mac. Even with the new push to allow more deeds-in-lieu, most industry experts expect the percentage of this type of relief for distressed homeowners to remain extremely low.
To help readers understand some of the ins and outs of these little understood instruments, I have included the highlights about deeds-in-lieu from a recent issue of Market Matters from the California Association of Realtors. If you feel this is something which might help you and need more information, please contact me and I get you to the right place.
- Some homeowners who are having problems making their mortgage payments may think that a deed-in-lieu of foreclosure – in which the lender agrees to take back the keys and let the homeowner walk away – is better than spending the time trying to do a short sale. This may seem even more appealing to homeowners because with a deed-in-lieu, the owners potentially can receive a few months of free rent.
- Although Fannie Mae and Freddie Mac recently updated their guidelines for deeds-in-lieu of foreclosures and now allow homeowners with hardships to live in their homes for up to three months without making mortgage payments, lenders rarely approve these transactions.
- A primary reason lenders are reluctant to approve deeds-in-lieu is that California allows non-judicial foreclosures, meaning the property is foreclosed through a trustee’s sale rather than the relatively lengthy judicial foreclosure process required in other states.
- Additionally, lenders only approve deed-in-lieu transactions if there is a single loan on the property or multiple loans with the same lender, which also greatly limits their usefulness, according to one broker. This makes doing a short sale a better option.
- With a deed-in-lieu, striking a deal with a first, purchase-money lien holder does not automatically get the homeowner off the hook when it comes to second or other junior loans.
- By contrast, in a short sale, all lenders must sign off, and California law requires them to forgive any remaining balance after the sale.
- Finally, in a deed-in-lieu agreement, a lender can request additional cash contributions be made by the homeowner, which are illegal in a short sale.
If I can help you find the perfect Napa Valley property, please contact me