Fannie Mae's 'Deed for Lease': Right for You?

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Fannie Mae; deed-for-leaseNo longer able to afford your mortgage payment? Thinking about walking away from your underwater house? Really, what you'd like is an affordable way to stay in your current residence until you find a better solution.

Then Fannie Mae's Deed-for-Lease program might be right for you.

The program was first announced in November 2009. Some have been denied access to the program because they have a second lien on their property. But with the new Home Affordable Foreclosure Alternative (HAFA) program, you may now be eligible.

HAFA offers incentives to servicers and second-lien holders to make a deed-in-lieu of foreclosure possible. If you have a Fannie Mae loan, and if you've been denied access in the past, it doesn't hurt to ask again.

What happens with the program is that you sign your deed over to Fannie Mae in lieu of foreclosure. In return, you get to rent your house back at market rents. If your house has dropped significantly in value, this can give you the time to transition to other housing that you can afford. You can rent your home from Fannie Mae for up to 12 months.

Here's how it works. Suppose you bought your home for $250,000, and now it's worth only $100,000. Your mortgage payment is $2,000, but market rent in your area is just $1,000.

Using this program, you would sign your ownership back to the lender, Fannie Mae, using a deed in lieu of foreclosure. Then you would sign up for the Deed-for-Lease program.

As long as you qualify and your property qualifies, you could lower your monthly costs and stay in your home.

This program also works for investors who have renters in the property. The investors can agree to a deed-in-lieu of foreclosure and their tenants can apply for the Deed-for-Lease program.

For your property to be eligible:
  • The property must be habitable. Repairs might be necessary to qualify for the new property value.
  • The property must be in compliance with local rules and laws, or you'll have 30 days to bring it into compliance.
  • The property cannot be a target for any corporate, government or community neighborhood stabilization plan.
  • Its market rental income must cover ongoing maintenance and management costs.
  • If you belong to a homeowner's association, it must allow rental properties.

For you or your tenant to be eligible:
  • Your income must be sufficient to cover rental payments of not more than 31% of gross income.
  • Property inspector agrees that you have kept the property in good condition.
  • Number of occupants is appropriate for the home and in compliance with local laws and homeowner association rules.
  • Occupants signing the lease must agree to a credit review and all occupants over age 18 must have an acceptable background check.
  • No sign or reports of illegal activities conducted at the property.
  • The property will be use for a personal residence.

As long as your property is eligible, you will be assigned to a property manager who will do the inspection and manage the property once you are accepted into the program.

The property manager meets with you within 10 days of application. At the meeting you will need to fill out a formal application and pay a $75 processing fee for the application. If it's a multi-unit property, the $75 fee will be collected for each unit. The property manager then will inspect the property to be sure it meets local codes and regulations and that the property has been adequately maintained.

Be forewarned: Once Fannie Mae reports a deed-in-lieu of foreclosure, your credit score takes a hit. But if you've been having credit difficulties for a while, your credit score is probably already severely damaged.

This program gives you time to start rebuilding your score and allows you to free up additional funds to start paying down other debt. You can use the 12 months to start rebuilding your credit and begin the process of financial healing.

If you've suffered a job loss, this program will give you time to find a job without displacing your family, as long as you have enough income to pay the monthly rent.

How do you get started? You can call you lender and find out if you're qualified. You may also want to contact a HUD Housing Counselor, who can help you through the process.

Lita Epstein has written more than 25 books including The 250 Questions You Ask to Avoid Foreclosure and The Complete Idiot's Guide to Personal Bankruptcy.
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