Many borrowers have a sense that their home is “underwater,” where they owe more than the property is worth. Yes, values in many areas are improving, but they aren’t back to where they were five years ago for many. Traditionally, no lender is going to lend you more than the property is worth – the risk is too high – it’s better to just send them the keys. Right? Wrong. But there are some things borrowers should keep in mind.

Is a "deed-in-lieu" of foreclosure (in which the lender agrees to take back the keys and lets the borrower walk away) better than spending the time trying to do a short sale, especially because with a deed-in-lieu, the borrower now potentially can get a few months of free rent? No, or at least check with a reputable loan officer. Fannie Mae and Freddie Mac recently came out with new guidelines for a deed-in-lieu of foreclosure, and now homeowners with hardships can turn over the house keys and erase their debt - even if they are still current on their payments. Some struggling borrowers who relinquish their homes can live in them for up to three months without having to make mortgage payments.

Remember, though, that lenders only approve deed-in-lieu transactions if there is a single loan on the property or multiple loans with the same lender, which greatly limits their usefulness. In the vast majority of cases, it's usually not the most advantageous foreclosure-prevention option for a homeowner, assuming a lender will even agree to a deed-in-lieu.

It's better to do a short sale especially if there is more than one loan. That's because striking a deal with a first, purchase-money lien holder does not automatically get the homeowner off the hook when it comes to second or other junior loans. Also, in a deed-in-lieu agreement, a lender can require additional cash contributions be made by the homeowner, which are illegal in a short sale. So be sure to talk to someone knowledgeable in lending before deciding on a course of action!


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