Fannie Mae to Allow On-time Borrowers to Walk Away… Should You Sign a Deed-in-Lieu?

If you’re an underwater California homeowner, the answer is probably “No.”

In California, you’re far better off to choose a short sale. Here’s the real story…

At first glance, the Announcement that starting in March 2013 Fannie Mae and Freddie Mac would let borrowers who are current on their payments sign a “mortgage release” and “wipe out their debt,” sounds good.

But keep reading. While the announcement says they’ll allow on-time borrowers to walk away from their underwater mortgage debt, it goes on to say that only certain homeowners will be eligible. You must first show a valid reason why you need to move. This could be illness or a job change.

And while they use the words “wipe out the mortgage debt,” that only applies to borrowers without financial reserves – and without second mortgages.

Borrowers can be required to pay up to 20% of their financial reserves to help make up the shortfall – or be required to sign a promissory note for future no-interest repayments.

In addition, the second lien holder can demand payment before releasing its lien.

And, since the mortgage release is simply a deed-in-lieu transaction, and will report to the credit bureaus just as if you went through a foreclosure, it’s a pretty hollow victory.

In California, if you short sale instead of waiting for a foreclosure or signing a deed-in-lieu, none of your lien holders can demand payment for the shortfall.

Our opinion: If you’re a California homeowner with financial assets and/or a second mortgage, you’ll be far better off to short sell the house. You may need to have a few late payments show on your credit report, but you’ll actually walk away free from that mortgage debt. In addition, you’ll be eligible for a new mortgage loan 3 to 5 years sooner.

We have the experience and the negotiating expertise to get your short sale closed. So before you risk your financial future, give us a call. You can reach us by writing td@tomdunlap.com or by calling 619-929-1413.


Please note that the information provided on this San Diego short sale page is generic, academic information used for general information purposes and may not be construed as or relied upon as a promise for a specific outcome.

This site provides information about real estate, law, income taxes and credit scores as relates to borrowers in distress, short sales and similar situations. The site is designed to help users safely cope with their own needs. Information is not the same as advice — the application of law or regulations to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer, tax adviser or other specialist if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation. The models in photographs accompanying the testimonials on this website are used for illustrative purposes and are not a personal endorsement.