A mortgage is a serious investment. So serious, that a home purchase is the largest investment made by the average American. There are also incredibly few people who are able to purchase a home outright. That’s why getting a mortgage loan through a bank or lender is pretty much the average American’s only hope of becoming a homeowner, and getting a steamy slice of the legendary American dream.
Home loans are nothing to joke about either. With the average home loan amount sitting around $250,000, mortgages are large debt obligations that span over long periods of time, with 30-year mortgages being the most popular term duration. Plus, potential borrowers also need to factor in the additional fees associated with a mortgage transaction like the down payment and closing costs. With all the financial commitment required, it’s no wonder so many people choose to rent until they are absolutely sure they can withstand the financial burden of a mortgage loan.
While many people who end up getting mortgages are very successful at repaying their debt, not every homeowner is that fortunate. No one can predict the future, and no one is immune to hardships. Sometimes, things happen that are way out of the scope of a borrower’s control, and paying a mortgage becomes next to impossible.
Homeowners who are no longer able to afford to pay their mortgage are in an extremely sensitive position. They need to make a decision quickly if they want to avoid going into delinquency and defaulting. If they don’t, their mortgage default could easily lead to a foreclosure, and no one wants to have to face that. Borrowers in this situation need to know which options are available, and of those that are available, which is the best option for their individual situation?
Every situation is different, but generally, homeowners have several options when faced with a mortgage that is no longer affordable. Short sales are a strong option for many borrowers, as long as they have the time to organize a listing and get the property sold in order to settle their debt. For borrowers who believe that the hardship is only temporary, a mortgage modification is a great way to stay in control of a home loan until the financial hardship has passed.
A mortgage release is another way that homeowner can free themselves from the burden of a mortgage that they can no longer afford. A mortgage release allows homeowners the option of simply walking away from their home. While the actual process is slightly more complicated than that, it’s more or less the desired result.
What is a Mortgage Release?
A mortgage release, also referred to as “deed in lieu of foreclosure” (DIL), is when a homeowner relinquishes the ownership of their property voluntarily to the owner of the mortgage, often a bank or lender, in exchange for a release from the mortgage and all future mortgage payments. This is not to be confused with a release of a mortgage that occurs when a homeowner pays a home loan off completely. Instead, a mortgage release is for homeowners who simply wish to walk away from both the property as well as the mortgage loan used to purchase it. Mortgage release is one of several options that homeowners can consider in order to avoid foreclosure.
Like most things in the home finance industry, mortgage release requires cooperation between the homeowner and the bank or lender holding the mortgage. Still, we weren’t kidding when we likened the process to walking away. A mortgage release typically leaves the homeowner with three options for leaving the home once it is approved.
How does a Mortgage Release Work?
For homeowners who are seeking a way to avoid foreclosure, a mortgage release might be the best option. After all, a short sale requires you to find a buyer in a short period of time, which can be tricky. And, mortgage modifications can be hard to qualify for and don’t always completely free you from having to repay your debt obligation. Still, that isn’t to say you can simply call your lender, tell them the keys are in the mailbox and ride off into the sunset.
How to Get a Mortgage Release
Homeowners who find themselves facing financial hardships must first decide whether or not a mortgage release is the best course of action. While acting in a timely manner is important in avoiding foreclosure, it’s essential that a homeowner weighs all available options before rushing into any one of them. If you decide that a mortgage release is the best option for your individual situation, you should take the following steps to get started:
Talk to your lender. The very first thing you should do is have a conversation with your lender. Tell them about your interest in relinquishing your ownership of the property to them in a deed in lieu of foreclosure arrangement. The lender must first determine your eligibility, which requires scrutinizing such things like the value of the property, how much you still owe, as well as reviewing your current hardship.
Gather your financial documentation. The lender is going to need to look deep into your financial situation. That means that the following documentation is expected: Mortgage statements, bank statements, statements for any other debt obligations (car loan, student loan, credit cards), proof of income, W2s, and paystubs.
Explain your hardship. This can be the hardest part for some home buyers, but it’s extremely important to clearly communicate the details of why you are unable to keep paying your monthly mortgage payments. You’ll also need to tell them whether you believe it to be a long-term issue, and why you’re willing to relinquish ownership of the property in order to avoid foreclosure.
Go over the DIL agreement. If a homeowner is found eligible, the lender will send what is known as a deed in lieu of foreclosure agreement. The deed in lieu of foreclosure agreement is highly important to the entire process, as it details the timeline that the homeowner must complete the necessary actions by, as well as lists all the relevant terms and conditions of the process. It is to be signed and returned to the lender.
Settle any outstanding obligations relevant to the property. The lender will order a title search as soon as you are approved. Any liens must be taken care of by the homeowner at this time. In addition, if there is a mortgage insurance company involved, they would have to be notified of the release and give consent.
Review your options. Once everything has been taken care of, the lender will present the three options for vacating the property. Depending on the situation you get some options as to how soon you will be leaving the home.
It’s important to remember that a mortgage release typically takes around 90 days from start to finish. In addition, in some cases, homeowners are expected to pay a specific financial contribution in order to be eligible for a mortgage release.
Mortgage Release Options
Once a homeowner is approved for a mortgage release, they are usually given three options to choose from as to when they plan to leave the property. Depending on the details of the specific case, homeowners can receive up to $3000 as a cash incentive to help with their relocation expenses. Homeowners have the choice of:
Leaving immediately
Staying in the home for a period no longer than 3 months rent-free
Leasing the home for up to 12 months at the current market rate
Homeowners are required to leave the home in good condition, both inside and out. All trash from both the interior as well as the exterior should be removed, and the property must be reasonably clean, and free of any damages. Personal belongings must be removed from the property, and any access items such as keys, garage openers, and any alarm codes must be delivered to the mortgage lender.
When to Consider a Mortgage Release
Walking away from a property and a mortgage is a seriously tough call. Homeowners are literally abandoning any equity they may have accumulated, and are left without any sort of profit to put towards a new home. So when is a mortgage release the right call to make?
Generally, homeowners who should consider a mortgage release are ones who are not only facing long-term financial hardship, but who are also ineligible to refinance or modify their mortgages. Interestingly, a mortgage release might also be a smart move for homeowners who owe much more on their home than it’s actually worth.
A mortgage release can still be an equally viable option for folks in less dire situations. For example, homeowners who are sure that they will not be able to continue paying for their home much longer, or those who haven’t had any luck trying to sell their home. This is also the case for those who simply don’t wish to sell their home for any given reason, particularly if they are absolutely ready to leave.
Benefits of a Mortgage Release
While it may seem like throwing in the towel, a mortgage release isn’t nearly as bad as a foreclosure. Knowing when to walk away can save you tons in the long run. Not to mention that mortgage releases aren't completely devoid of benefits.
Through a mortgage release, a homeowner:
Cancels out their mortgage debt
Doesn’t have to go through a foreclosure
Could be eligible for a $3000 incentive (in some cases)
Residents in the states of CT, DC, IL, MA, MD, NJ, NY or PA may be eligible for up to $10,000
Are able to repair their credit faster than after a foreclosure
Can be eligible for a conventional mortgage after only 2 years (as opposed to 7 years after a foreclosure)
Have options to choose from regarding when they leave the property, giving them a better chance at planning and executing a successful transition.
Mortgage Release Termination
A mortgage release does not become set in stone simply because a homeowner signs the DIL agreement. In fact, any violations of the terms and conditions listed in the DIL can lead to a termination of the agreement by the lender. Mortgage companies have been known to terminate a mortgage release for any of the following reasons:
Failure of the homeowner to meet the deadlines specified in the agreement
Positive changes in the homeowner’s financial situation
The lender determining that the agreement was undertaken in “bad faith”
Any negative changes in the condition of the property
A bankruptcy filing during the mortgage release agreement timeline
The lender’s inability to locate a clean title for the property
Mortgage Release: In Review
Avoiding foreclosure is any homeowner’s number one concern. Mortgage loans certainly are not the easiest debts to repay, so homeowners should always try to stay ahead of the game. That said, financial hardship can hit anyone at any time without warning.
In these periods of hardship, making the right choice concerning your mortgage debt is the key to surviving the crisis. One possible way to avoid foreclosure is to get a mortgage release. As we’ve discussed, a mortgage release allows a homeowner to voluntarily give up the ownership of their home to their mortgage company in return from being freed from their mortgage debt obligation.
It may sound rather drastic, but mortgage release is a solid way out for homeowners who can no longer afford their mortgages. If you should ever find yourself in a position where you feel as though you can no longer afford your home, or you would simply like to learn more about the mortgage release process, you can always give the experts at home.loans a call and speak with a mortgage specialist!