There is a new (actually renewed ) option for underwater homeowners who cannot, or do not want to pay their mortgage. A deed in lieu of foreclosure is an agreement between the bank and the borrower. The borrower gives the home back to the bank and the bank does not have to go through the foreclosure process. It can be a win win situation for both the bank and the borrower.
The government HAFA program is the major force behind this renewed option. If a borrower does not qualify for a loan mod, or gets a mod and is not able to make the payments, this government program encourages the banks and the borrowers to pursue either a short sale or a deed in lieu. By encouragement I mean gives financial incentives, in order to decrease the number of foreclosures, vacant homes, and neighborhood blight.
Under the HAFA deed in lieu program the borrower agrees to give the home back to the bank and in exchange the bank helps with some relocation costs and also agrees not to pursue a deficiency judgment. Depending on the state the borrower lives in and they type of loan, after a bank forecloses or agrees to a short sale they still may have the right to go after the borrower for the amount of the money the bank lost. HAFA stops that ability of the bank to pursue a deficiency.
In addition to the halting of any deficiency judgments, the privacy afforded by not being foreclosed and evicted, and the help with re-location costs (Bank of America is offering $3,000-$15,000) borrowers who agree to a deed in lieu can purchase another home after 2 years instead of the 5-7 after a foreclosure.
So what is the catch? The pesky second loan once again can get in the way. If the borrower has a HELOC or second loan on the property this process does not work. In these cases the borrower must try for a loan mod, do a short sale, or be foreclosed if he/she can not pay the mortgage.
In California as well as other high priced states many homeowners have at least two loans on their homes. The cost of the home required so much down payment that many borrowers used a second loan in place of, or in addition to the amount they had for their down payments. As a result the option of a deed in lieu of foreclosure is not an option.
If you have any questions about short sales, foreclosures, or any other real estate issues feel free to email and ask, or post in the comments section of my blog.
*thanks to Irving Housing Blog for the image