Homeowners who can’t afford their mortgage payment, but still want to live in their current home may be keen to learn more about Fannie Mae’s new Deed for Lease program, which allows homeowners to sign a deed in lieu of foreclosure and then rent back their home and continue to live there.

The program, known as “D4L,” is another option for homeowners who are in danger of foreclosure but aren’t eligible for a loan modification, according to Fannie Mae Vice President Jay Ryan.

“This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period and helps to stabilize neighborhoods and communities,” Ryan said in a Nov. 5 statement.

The program also is intended to minimize “deterioration of neighborhoods caused by vandalism and theft to vacant homes, and the effects these have on families, communities and home price stabilization,” according to a Fannie Mae document.

Deed for Lease may not help many homeowners

That’s the upside. The downside is that the D4L program is riddled with so many rules and restrictions that relatively few people are likely to be able to take advantage of it. Indeed, Fannie Mae accepted only 1,996 deeds-in-lieu from homeowners in the first nine months of 2009.

What’s more, critics have charged that these types of help-for-homeowners programs generally are more about favorable publicity than actual aid for borrowers.

Sean O’Toole, CEO of ForeclosureRadar.com in Discovery Bay, Calif., says such programs are “more about the headline than the reality.”

Erik Weichelt, president of Weichert Elite, a real estate brokerage in San Diego, and a specialist in the sale of bank-owned foreclosed homes, says the new program may “sound nice” and “seem wonderful,” but at the end of the day, homeowners may be “better served by getting on with that part of their life and starting over” in another home.

The bottom line on whether the D4L program is a boon or a bust may depend, as such matters often do, on the homeowner’s personal experiences.

“For some folks who are living in a house that’s nicer than they ever would have been able to afford, getting more time there is a gift. For some folks who don’t want the disruption of moving, it’s a gift. For others who are bitter at the fact that they bought the house or someone convinced them to get the loan, it’s a day-to-day reminder of the mistake they made,” O’Toole says.

How to qualify for Deed for Lease program

Such controversies aside, here’s a summary of the rules:

  • The D4L program is open only to homeowners who have a conventional Fannie Mae loan.
  • The homeowner must be unable to afford the mortgage payments or qualify for a loan modification. Homeowners who want to walk away from their mortgage only because the value of their home has declined aren’t eligible.
  • The loan cannot be guaranteed or insured by the Federal Housing Administration, U.S. Department of Housing and Urban Development, Veterans Administration or Rural Development agency of the U.S. Department of Agriculture.
  • The homeowner must have made at least three mortgage payments since the loan was originated or last modified and cannot be 12 or more payments past due on the loan.
  • The homeowner must sign a deed-in-lieu to give up ownership of the home, a general release of any claims related to the loan or home, and a lease agreement, which may have a term of up to 12 months.
  • The deed-in-lieu will be reported to the credit bureaus as such, which could result in slightly less damage than a foreclosure to the homeowner’s credit.
  • The homeowner must be able to deliver title to the home free and clear of any second mortgage or other lien.
  • The home must be the principal residence of either the homeowner or a renter who agrees to the terms of the new lease. Second and vacation homes aren’t eligible.
  • The homeowner must be able to pay market rent, and that rent cannot be more than 31 percent of the homeowner’s income. Homeowners who have no source of income aren’t eligible.
  • The rental applicant (i.e., homeowner or renter) must pay a nonrefundable $75 application fee, which will be applied to a credit report and background check on the occupant of the home.
  • The home must be inspected and the cost of needed repairs must be deemed acceptable based on the home’s value.
  • The rental income must be high enough to pay Fannie Mae’s anticipated maintenance and management costs.
  • The renter must agree to be responsible for regular maintenance and to keep the home in good condition.
  • Renters’ insurance is required if the renter has a pet in residence.

Thinking about a new home? Should you rent or buy?

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