I’m often asked about whether a Lender would rent back to a debtor after a foreclosure. Generally the answer is no since there may be a new buyer at the foreclosure or, if the lender gets the property back as an REO, they typically want to re-sell it as soon as possible. But this may be possible with a Deed in Lieu of Foreclosure (“DIL”), particularly if the loan is owned by FannieMae (FNMA).
Unlike a foreclosure which is a forced transfer, a DIL is a voluntary transfer of the title to the property from the lender. This saves the lender time and money. And it can allow space and communication for negotiations. If a loan modification or a short sale is not possible, the DIL allows the debtor to get rid of the property while avoiding the deficiency judgment risk and credit damage of a foreclosure. Here’s how it works:
In late 2009, FNMA started what it calls a “Deed for Lease Program” which combines a DIL with a Lease-back to the occupant for up to 12 months. The program is targeted for qualifying homeowners who are facing foreclosure but do not qualify for a loan modification. As stated by FNMA: “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.”
The basic qualifying requirements are :
1. It must be a first loan on a 1-4 unit property. The loan cannot be government guaranteed (FHA, VA, HUD, Rural Dev.); Any junior liens must subordinate;
2. It must be the borrower’s primary residence or their tenant’s primary residence;
3. The occupant must meet income and payment guidelines (similar to HAMP) and cannot be in bankruptcy or litigation involving the property or the loan.
If the occupant meets the qualifications, FNMA will Lease the property back to the occupant for up to 12 months after completion of the DIL at a market rent not to exceed 31% of the occupant’s monthly gross income. What is very significant here is that the Lease-back can apply to tenants in the borrower’s rental property. While we’ve not seen any other lenders offer a similar Deed for Lease program, a request for lease-back could be part of any DIL negotiations.
To learn more about the FNMA Deed for Lease Program, click on these links:
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