For trapped homeowners unable to short sell or refinance their underwater home mortgages there may be a new option on the horizon.
Starting March 1, Fannie Mae and Freddie Mac will let some borrowers with certain hardships who kept up payments as their homes lost value erase their debts by giving up their properties in a so-called deed-in-lieu transaction, which wipes out the shortfall between a property’s value and size of its mortgage. The federal government will offer loan servicers $1,500, up from $275, for every deed-in-lieu completed, and will offer up to $6,000 to second-lien holders to expedite deeds-in-lieu.
To qualify for the program, borrowers must have a 55 percent debt-to-income ratio, meaning 55 percent of their monthly gross income goes to paying debt. Moreover, homeowners have to document a hardship, such as illness, unemployment, reduced income or divorce for Fannie and Freddie to consider the deal. For a deed-in- lieu transactions, servicers must confirm the property is being left in good condition. Borrowers have to fill out a five-page form to participate in the new deed-in-lieu program.
There are 10.9 million underwater properties, worth much less than the mortgages on them, according to RealtyTrac. The deed-in-lieu transactions, which require homeowners to leave properties in good condition, preserve the value of homes by preventing owners from abandoning them.
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