New Alternative to Foreclosures

avoid foreclosure alternative

In an effort to stem the growing tide of mortgage loan defaults across the country, the federal government has come up with yet another alternative: a deed in lieu of foreclosure agreement (DIL).

The DIL offers another option to homeowners who are unable to complete a short sale or who don’t qualify for one.

The Home Affordable Foreclosure Alternative program (HAFA) is intended to encourage lenders to facilitate short sales and deeds in lieu as alternatives to foreclosure. HAFA is part of the Home Affordable Modification Program (HAMP).

A deed in lieu of foreclosure allows a homeowner to hand the house over to the bank and walk away from the property. While it would still negatively impact the home seller’s credit score, it is preferable to a foreclosure. A foreclosure can stay on the credit report for about five years; a deed-in-lieu can be wiped out in about four years.

A DIL also allows homeowners to voluntarily give up the home to satisfy the first mortgage, even if the home is worth less than the loan balance.

Among the government’s other HAMP guidelines:

* Homeowners can receive 1,500 dollars in relocation expenses at closing. This amount may be reported as income to the IRS.
* Short sale buyers can’t resell the home within 90 days of the purchase.
* The home must be the homeowner’s principal residence.
* The homeowner’s monthly mortgage payment must be greater than 31 percent of his or her gross income.
* The mortgage needs to be delinquent or default must be reasonably foreseeable.
* The unpaid loan balance must be less than 729,750 dollars for a single house or condominium.

The program started April 5 and is scheduled to go until December 31, 2012. Right now, loans that are owned or guaranteed by Fannie Mae or Freddie Mac are excluded. However, the two government-run mortgage corporations are expected to release their own guidelines shortly.

Source: Snow Anderson (writer on RealEstate.com)

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