Imagine that you’ve lost your job and need to move out of state to find a new place to work, but then you learn that you aren’t allowed to leave. No, you aren’t being detained by a police investigation, but your mortgage company. A fresh start might be crucial for your rapidly failing finances, how can your bank keep you from moving to find a new job?
Kurt at Money Counselor does a great job explaining how some people are literally trapped in their homes. Nearly one in four mortgages is currently underwater; meaning that owners owe more on their loan than their house is worth. It’s a depressing situation to be in, and not just because you’ve likely seen your home value erode. In these situations, banks are not likely to let you sell your home.
Sure, this is just one of many stories told about the 22 million Americans who have negative home equity, but it is a common tragedy for those who are seeking employment or a forced to move due to military deployment.
Starting March 1st, Fannie Mae and Freddie Mac are implementing new rules for a Deed-in-Lieu of Foreclosure program. Bloomberg relayed some of the details a few days ago. While the program seems promising for those currently trapped in their homes, there are a few things you want to consider before signing on to the program.
How Does Deed-in-Lieu of Foreclosure Work?
Deed-in-lieu of foreclosure sounds like a mouthful (and thus some complicated finance term that only investment brokers can understand), but the idea is really quite simple. Generally, when a bank wants your house, they have to take you to a judge and have a court turn your property over to them. A deed-in-lieu of foreclosure is when you decide to walk away from your home, turn over ownership to the bank and forego the entire foreclosure process. Essentially, it’s self-inflicted foreclosure.
It Won’t Help Your Credit
The very term deed-in-lieu of Foreclosure seems to invoke a perception that you have dodged the big foreclosure bullet. Unfortunately for your credit score, it’s not any different than if your loan went into foreclosure. It will save you some fees and filing, but at the end of the day, the result is the same: you lose your house, you get dinged on your credit score and you will need to deal with the effects for years to come.
It May Not Solve Your Problem
Why ask for a deed-in-lieu of foreclosure? The obvious answer is that you want to walk away from your home and climb out from under repayment obligations. However, a deed-in-lieu of foreclosure can be subject to recourse in some states. Recourse occurs when banks lose money because the value of your house is less money than you owe. Recourse gives banks the option to sue you later to recoup that lost value.
So, if you happen to be looking to get out of your house and start a new job in a faraway city, deed-in-lieu of foreclosure may not protect you from paying money for your house after you give up ownership.
You’ve Got to Take Good Care of the Property
Here’s something you probably wouldn’t have considered: your house needs to be in good condition to be approved for a deed-in-lieu of foreclosure.
When a house goes into foreclosure, the soon-to-be-evicted homeowners often stop taking care of the home. There isn’t much of a reason to clean when you know the bank is about to possess your house. The deed-in-lieu of foreclosure program requires that you maintain your house as a condition. So remember, just because you are losing your house, you still need to clean the floor.
While there are issues that need to be considered carefully, the deed-in-lieu of foreclosure program could be a great help for many struggling homeowners. It does offer a viable alternative to a short-sale and provides options for people who would otherwise be trapped in their house.