The Federal government's most important financial relief for underwater homeowners started operation on November 1, 2012. However, there are still some snares and drawbacks for participants. In this new financial relief program, the borrowers facing a housing downturn are offered short sale. This program is mainly designed for those who resisted the temptation to default the mortgage payments strategically and never fell seriously behind on their monthly loan payments.
Borrowers who take part in the new underwater mortgage relief program can expect to rid of their mortgage without facing the nightmares of foreclosure or bankruptcy. This new relief program will even help them to get a chance to start anew. This time, they will be better equipped to deal with the financial hardship that forced them to sell off their property.
However, there are certain disadvantages or cons of this new underwater mortgage relief program. Let's take a look at them:
Impact on credit score: At this present moment, it appears that this new program will have significant negative impact on the FICO scores of the borrowers. The scores may get lowered by 150 points or more. However, the officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry. The main reason behind the lowering of scores is that according to the current credit industry practices, short sales are lumped in with foreclosures.
Sign promissory notes or make upfront contributions: In most of the states, the lenders can pursue deficiency judgment after a short sale or foreclosure. In such a situation, those who go for the new program, Fannie and Freddie expect borrowers who have assets to make upfront cash contributions to pay off some of the loan balance or sign a promissory note. This would be in exchange for an official “waiver” of the debt for credit reporting purposes and offer a more favorable seller credit score.
The issues of second lien: According to this new program, there is a limit of $6,000 limit on what second lien holders can claim. This is the amount that the second mortgage lender on underwater properties can receive out of the short sale. Second mortgage lenders may not consider this as sufficient amount and may try to stop the sale in any way or the other.