Deed In Lieu
HAFA (Home Affordable Foreclosure Alternative Program) is available for homeowners who qualify. The alternatives to foreclosure are Short Sale and Deed In Lieu.
A Deed in Lieu of Foreclosure is a potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage. Both sides must enter into the agreement voluntarily and in good faith.
In April of 2010, the Treasury Department initiated the HAFA program to provide a viable option for homeowners who are unable to keep their homes through the existing Home Affordable Modification Program (HAMP). HAFA is intended to help when HAMP does not provide a workable loan modification solution; such as when homeowners are so far behind or upside down that a modification doesn’t make sense.
HAFA provides financial incentives to mortgage companies and borrowers who utilize a short sale or a deed-in-lieu of foreclosure (DIL) to avoid foreclosure. These financial incentives are to help borrowers relocate. Cash incentives, sometimes called cash for keys can help pay for the expense of relocation. These cash incentives can take place with a short sale or with a deed in lieu. Cash incentives do not take place with walk aways or strategic defaults.
The HAFA program provides the following short sale benefits:
Minimum Net Price. Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds). The minimum net proceeds may be either a fixed dollar amount or percentage of the current fair market value of the property. It cannot be increased for 120 days.
No Commission Reduction. Prohibits lenders from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
Release of Remaining Loan Balance. Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
Financial Incentives. $3,000 for borrower relocation assistance; $1,500 for servicers to cover administrative and processing costs; and up to a $2,000 match for investors for allowing a total of up to $6,000 in short sale proceeds to be distributed to junior lien holders (up to 6 percent of the remaining balance of each junior lien)
If a short sale is unsuccessful, the lender has the discretion to accept a deed-in-lieu of foreclosure.
The borrower still receives a waiver of the loan deficiency and up to $3,000 in relocation assistance. The borrower must agree to vacate the property by a certain date and leave the property in broom clean condition. In addition, the borrower must be able to deliver clear and marketable title; thus, all subordinate lenders must also agree to release their liens for the DIL to proceed.
If a borrower has more than one lien on their property, it is the responsibility of the borrower to work with the listing real estate agent and the lien holders in order to clear all liens. Typically, the first lien holder will authorize a portion of the gross sale proceeds as payment to the subordinate lien holder(s) in exchange for a lien release and full release of borrower liability. If the subordinate lien holder agrees to participate, it may not require contributions from either the real estate agents or the borrowers as a condition for releasing the lien and releasing the borrower from personal liability.
In order to be eligible for HAFA short sale or deed in lieu, the homeowner must meet the HAMP guidelines, which are:
- the property is the borrower’s principal residence
- the mortgage loan is a first deed of trust originated prior to January 1, 2009
- the mortgage is delinquent, or a default is reasonably foreseeable
- the current loan balance is less than $729,750
- the borrower’s total monthly mortgage payments exceed 31% of the borrower’s gross income.
HAFA excludes loans that are owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners should also talk to a qualified tax professional regarding any income tax consequences.
Deed in Lieu and Short Sale are options for homeowners who have been denied a HAMP modification. Your home will need to be listed for sale with a qualified short sale agent (or attempt a short sale) before the lender will consider a deed in lieu. We strongly recommend you list your home with an experienced short sale realtor/agent (or attempt a short sale) while you simultaneously approach your lender regarding a deed in lieu. We strongly encourage you not to walk away or strategic default when you can pursue a short sale.
What is strategic default? Strategic default is the decision by a borrower to stop making payments on a debt despite having the financial ability to make the payment.
Homeowners who can no longer afford their monthly payments should not walk away from their mortgage unless they have explored all other options. There has been a lot of stories over the past couple of years about people who willingly walk away from their homes even though they can still afford to pay for them (strategic default). Fannie Mae is trying to crack down on those people by instituting a policy that says if you walk away without trying to work something out on your mortgage (short sale or loan modification) then it will be 7 years before you can get another Fannie Mae mortgage. Therefore the consequences of strategic default can linger much longer than if you short sale.