Deed In Lieu? You’re Not Alone
During the last decade, many wanting out of their mortgages without foreclosure opted for a deed in lieu of foreclosure (DIL). That means you hand your lender the keys and the deed to your house, and it cancels your mortgage in exchange.
The lender also agrees not to initiate foreclosure proceedings, or to discontinue a foreclosure if it’s already underway.
The best of outcomes for these transactions leaves you with no mortgage deficiency. (“Deficiency” occurs if the lender doesn’t get enough when it sells your house to cover the entire loan balance.)
That allows you to rebuild your credit more quickly and prepare for future mortgages. But lenders consider a DIL as serious as a foreclosure, because you didn’t repay your mortgage as agreed.
Mortgage After Deed In Lieu Of Foreclosure: Possible
So, can you get a new mortgage after a DIL?
How long must you wait afterward? Which lenders offer new loans to those who’ve made this deal on a prior mortgage? How do different lenders underwrite such mortgages?
These are questions any “boomerang” buyer — someone trying to buy after a foreclosure, short-sale, 60-day delinquency, loan mediation or other unsatisfactory closure like a DIL — must ask before re-entering the housing market.
Different Reasons, Different Rules
During the Great Recession, hundreds of thousands of borrowers nationwide stopped paying their mortgages because they were underwater. (This is called “strategic default.”)
Others lost homes because of illness, job layoffs or other catastrophes over which they had zero control.
Since then, both mortgage regulations and underwriting standards have changed substantially. You may be among the 1.5 million boomerang buyers returning to the home buying market in the next few years.
Your ability to get new home financing again depends on your situation.
The length of time that must elapse before you can get a new mortgage depends on the reason you opted for a DIL.
Because lenders consider a DIL as bad as foreclosure, they believe that decision dramatically increases the probability you’ll default again.
Strategic Mortgage Defaulters Wait Longer
If yours was a strategic mortgage default under which you exchanged your home for a DIL because the home was underwater, lenders will trust you less.
Many homeowners who strategically defaulted had solid professional positions and income, good credit and substantial cash reserves. The choice to default was a business decision when their home turned out to be a poor investment.
While this decision might have been a solid financial strategy, if you chose to default, financing another property may be difficult.
After a strategic default deed in lieu of foreclosure, the mandatory wait to get a new mortgage is four years for a conforming (Fannie Mae or Freddie Mac) loan under current regulations.
You’ll wait four to seven years for a jumbo loan. For these larger loans, expect more stringent underwriting.
In many cases, if you defaulted on your mortgage because of a situation you couldn’t control, you could get a new mortgage sooner. To be considered extenuating circumstances, the cause of your default must:
- Be beyond your control
- Result in a sudden, significant, and prolonged reduction in income; or
- A catastrophic increase in financial obligations; and
- Have been resolved
Those situations can include the death of a partner, unexpected injury or illness, a job loss or significantly reduced work hours.
You must be able to document the problem that contributed to you being unable to pay your mortgage. Acceptable documentation can include:
- Medical reports or bills
- Notice of job layoff
- Job severance papers
- A copy of insurance denials or claim settlements
- Property listing agreements, leases, or tax returns
While still considered a significant derogatory event to lenders, they view you less negatively because your circumstances were out of your control.
Those with these types of DILs can apply for Fannie Mae’s Extenuating Circumstances Program. If you’re approved, you can get a new home loan just two years after a deed in lieu of foreclosure.
The FHA “Back to Work” program, which allowed shorter waiting periods after a deed in lieu of foreclosure with mitigating circumstances, expired in September 30, 2016.
Currently, FHA requires a three-year waiting period for all who have a deed in lieu or a foreclosure in their recent past.
VA Home Loans
Veterans and servicemembers who are eligible for VA mortgages must wait at least two years after a DIL in most cases.
For documented mitigating circumstances, some lenders may okay a loan as soon as 12 months after the event.
Certain portfolio and “hard money” lenders provide alternative financing for those with troubled homeownership pasts. You may even be able to buy one day after executing a deed in lieu of foreclosure — if you’re willing to pay for the privilege.
These programs feature remarkably flexible underwriting guidelines as long as you have a substantial down payment, and can afford the higher fees and interest rates that go along with “non-prime” or “non-QM” financing.
What Are Today’s Mortgage Rates?
Today’s home loan costs, even for borrowers who don’t qualify for the best mortgage rates, are low. Contact a lender or two and see how affordable they are, and if you qualify to buy a home after a deed in lieu of foreclosure.