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.

Is a Deed-in-lieu safer or better than allowing a foreclosure?

Is a deed-in-lieu better than a foreclosure?

In a word, no. So what’s the difference?

In terms of your credit, there is no difference between a deed-in-lieu and a foreclosure. A deed-in-lieu merely saves the lender from spending the time and money to go through the foreclosure process.

The only difference to you is that you’ll probably know a definite date when you need to be out of the house – and you’ll probably need to be out sooner. With a foreclosure, your move-out date could be delayed for up to a year.

Meanwhile, under today’s guidelines, a foreclosure or deed in lieu will probably require 7+ years of good credit before buying a next home.

In addition, under California law, if you have a second mortgage that was not a “purchase money mortgage” the lender can come back on you for a deficiency after either a foreclosure or a deed-in-lieu. The only way to avoid that risk is through the short sale of your home.

The strange thing is, even though it’s more convenient, cheaper, and less time-consuming for the bank, you might not even be allowed to sign a deed in lieu. In order to be considered, you’ll have to fill out an application. And if you have two loans, you’ll probably be denied unless the same investor (not the same servicing company) owns both notes.

So… Is a deed-in-lieu better than a foreclosure?

Our answer is: “Don’t even consider it.” There simply is no benefit to the homeowner.

What about the January 2013 announcement from Fannie Mae?

In 2013 Fannie Mae announced that they’ll allow on-time borrowers to wipe out their mortgage debt through a new “mortgage release” program. This program is simply the re-naming of the deed-in-lieu process. And while it may be of benefit to homeowners in other states, it’s not a benefit to California homeowners. Here’s why.

Every situation is different. If you’d like specific answers that relate to your situation, call 619-929-1413 or write td@tomdunlap.com. We’ll be happy to analyze situation and provide the answers you need before making a decision that will affect your future.


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.

What Are The Alternatives to Foreclosure?

What can I do if I want to avoid foreclosure?

Walking away and letting a home go into foreclosure will destroy your credit rating for many years – and even longer if you get stuck in a zombie foreclosure. Let’s take a look at the other options for San Diego homeowners:

  1. Sign a deed-in lieu of foreclosure.
  2. Work with the lenders for a loan modification
  3. If you have an FHA loan and are unemployed, apply for forbearance
  4. Offer your home as a short sale

A Deed-in-lieu – This is a document that essentially hands your San Diego house back to the bank without going through the foreclosure process. Your bank may or may not allow you to do it, but even if they do, it’s not a good move. The effect on your credit rating will be the same as a foreclosure. Worse, if you have a non-purchase money second mortgage, the bank can come back on you for a deficiency.

Loan Modifications:
Although highly touted as the answer to the mortgage crisis, in reality few have been helped and many have been harmed.

In theory, the lender would alter your interest rate and lower your payments for a set time, allowing you some “breathing room” in which to get your financial life back in order.

In practice, thousands of homeowners have been “strung along” for months, only to be rejected – even after complying with all the terms during a trial period.

That doesn’t mean you might not be successful, and we on the San Diego Pro Team will be happy to explain the process to you and help you determine whether the bank would consider your application for modification. We have the same software the banks use, and we’ll give you the results instantly.

Forbearance: This is a wonderful tool for anyone who has an FHA loan and is unemployed. The bank simply suspends your obligation to make payments for a year. The unpaid interest is tacked on to the end of the loan.

During the forbearance period you are free to market the house for sale – without the threat of an impending foreclosure. This is true whether you have equity or need to short sale your house.

A Short Sale: Although the current market value of the house is less than the balance due on the mortgage or mortgages, the bank approves the sale and accepts the proceeds as payment in full.

Here in California the first mortgage and any secondary liens are wiped out by a short sale. After foreclosure, your secondary lien holders can obtain a judgment against you for their unpaid balance.

The short sale of a home does require extensive negotiation with the bank’s asset manager, who might be more inclined to force the homeowner into foreclosure. That’s why homeowners need an experienced agent at their side. We of the Tom Dunlap Team have the experience – and an enviable record of success in getting our short sale listings sold and closed.

Note that in a San Diego short sale, all costs of selling, agent fees, unpaid taxes, etc. are paid by the lender from the proceeds of the sale. When you short sale a San Diego home, you pay no costs beyond the expense of keeping the house ready to show to potential buyers.

What are the Odds of Success on a San Diego Short Sale?

When you have the right assistance, the odds are very good.

The successful short sale of a home begins with knowing each lender’s preferences and how to present the short sale package so that it gets timely and favorable attention. Then, it depends upon negotiating skill and persistence.

Tom Dunlap  is San Diego’s leading short sales specialist. He has negotiated thousands of real estate transactions and has a 98% success rate when negotiating with lenders on a short sale.

It’s no wonder – he not only has more than 25 years of experience in helping San Diego homeowners, he’s also an attorney and holds a Master’s Degree in Negotiation.

If you have questions about loan modifications, forbearance applications, or short sales – or if you’d just like to discuss the San Diego real estate market – please get in touch.

Call 619-929-1413 or write td@tomdunlap.com.


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.