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Posted April 18th, 2012 under Upside Down House Options

Renting from the Bank: A Way for Underwater Homeowners to Avoid Foreclosure?

Tags: avoid foreclosure, foreclosure help, underwater mortgage help

Renting from the Bank: A Way for Underwater Homeowners to Avoid Foreclosure?

Recently, Bank of America (BOA) announced a new program that it says will help underwater homeowners avoid foreclosure and stay in their homes. The solution? Renting from the bank.

Here's how Bank of America's "mortgage-to-lease" program works. Some homeowners who have mortgage through BOA and are facing foreclosure now have the option of turning over the deed to their home to the bank. This is a known as "deed in lieu" of foreclosure, and its impact on your credit rating is not as negative as a foreclosure. In exchange, the homeowner signs a lease and rents the home from the bank at a market rate (which is typically less than the mortgage payment). Fannie Mae rolled out a similar initiative, which it calls "deed-for-lease," in 2009.

Bank of America's pilot effort (which it's offered to 1,000 homeowners in three states, including Arizona, in March) is another way to provide underwater mortgage help to homeowners. Currently, homeowners who are struggling to pay their mortgage often try to obtain a loan modification. If that falls through, a short sale or foreclosure may be the homeowner's only option. But both short sale and foreclosure require a homeowner to leave the home. The prospect of having to uproot their family is one reason why so many people are desperate to avoid foreclosure or a short sale.

For some people, renting from the bank might seem like a great alternative to foreclosure or a short sale. But don't jump for joy just yet. BOA is currently testing the program with a limited number of homeowners. Only people who have mortgages through BOA are eligible, and you can't apply for the program; BOA has to ask you to participate. However, if your loan is owned by Fannie Mae, you may be able to participate in its deed-for-lease program.

So, if you're seeking foreclosure help, renting from the bank may not be an option for you right now. But that could change, depending on how BOA's pilot program goes. If the program is successful, other lenders might copy the initiative. And that might be good news for both homeowners seeking underwater mortgage help and for communities hit hard by the foreclosure crisis. Since foreclosures can drag down the value of surrounding properties (especially if the property is vacant), a mortgage-to-lease option could benefit you even if you don't take advantage of the program directly. At the same time, struggling homeowners are able to avoid foreclosure and stay in their home, which means they don't have to go through the disruptive and stressful process of finding a new place to live.

It's not clear yet whether mortgage-to-lease is going to take off. But if it does, it will be just one more option for underwater homeowners to consider. And it will be one more topic that we'll discuss with you if you take advantage of Homeowner 101's Underwater Homeowners Assessment and Action Plan. It's all part of our effort to provide the A.I.R. (Answers, Information and Resources) you need to make a decision about your underwater mortgage that's right for you and your family.