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New rules when dumping your mortgage

By Polyana da Costa · Bankrate.com
Friday, November 30, 2012
Posted: 5 pm ET

Mortgage giant Fannie Mae has announced new options for homeowners who want to hand over their keys to the lender to be released from their mortgages.

Borrowers who can't afford their mortgage payments and choose to transfer the titles of their homes to the lender will be offered a chance to stay in the home rent-free for three months or lease the house for a year, according to updated guidelines that Fannie sent to servicers Thursday.

Fannie also has given a friendlier name to this process, which has long been referred to as a deed in lieu of foreclosure. According to the guidelines, the new process should be referred to as a "mortgage release."

Will you really become mortgage-free?

The new name can make the deal sound more attractive to borrowers, says Layden Hale, senior counseling adviser at Homeport in Columbus, Ohio. But borrowers shouldn't be fooled by the name and simply assume they will be fully released from the liability on their loans, he says.

Fannie Mae requires mortgage servicers to assess the borrower's financial situation and whether the home to be taken over by the lender is worth less than the balance of the loan. They will then determine whether the borrower can afford to make partial payments. If the mortgage servicer determines the homeowner has more than $10,000 in savings and investments, excluding retirement accounts, the guidelines require the lender to request a partial payment from the borrower.

The servicer will also calculate the homeowner's debt ratio -- based on monthly expenses compared to gross income -- to determine if the borrower can afford to sign a promissory note and make small payments over time.

"Most of my clients who are interested in doing a deed-in-lieu have exhausted their resources," Hale says.

Borrowers with limited income are most likely to be released from their loan obligations under the new guidelines. But it's important to consult an attorney and an accountant before signing the paperwork, Hale says.

Is it worth going through the hassle?

Homeowners who can't sell their houses, can't afford their mortgages and are ready to let go are better off signing over the title to the lender than simply walking away from the house, Hale says. The deal won't damage the borrower's credit as much as foreclosure would, and the homeowner may qualify for relocation assistance.

Servicers can offer borrowers up to $3,000 in assistance as long as they are being released from the mortgage without a promissory note or other financial contribution from the borrower, according to the recently released guidelines.

"But remember that servicers don't always lead with that information," Hale says. "You have to ask for that when you are discussing your options."

Servicers are required to implement the new guidelines by March 1, 2013, but can adopt them earlier, Fannie Mae says.

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