“The Big Move” is a MarketWatch column that covers the ins and outs of real estate, from navigating for a new home to applying for a mortgage.
Have a question about buying or selling a home? Want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Shortly before the pandemic, my husband took a job that required us to move out of the state; however, we did not have to do this yet because of telework. My husband and I have two young children. Thanks to our teleworking, in-laws observe our children in our home and often spend several days there.
My husband and I asked his parents to move in with us when we moved. In theory, this is a great plan for everyone involved: free babysitting, less expenses for them, and we all enjoy each other’s company.
The dilemma is that my in-laws are underwater for $ 50,000 in their town home. The house has problems with water penetration and foundations, making it only worth around $ 100,000 at best. My father-in-law is a very disciplined man and thinks leaving is not appropriate. She believes that continuing to pay off her mortgage is the best plan, even if they don’t live at home.
A short sale, even if the buyer were willing to deal with the problems, would be devastating to any savings they have. My husband thinks that the best option is to leave and take over the loan in the form of execution. They would live with us and would no longer have any obstacles to paying off their mortgage.
In addition, my husband is the only child and designated heir. My husband realizes that whenever his father dies (he is 71) he will have to take care of the house. Should my father-in-law continue to pay or leave? Are there other options we should consider?
Your letter is an important reminder that even in a time when house prices are skyrocketing, many Americans still owe mortgages than their homes are worth, also known as “being underwater” at home.
Millions of Americans found themselves in this position as a result of the subprime mortgage crisis that caused the Great Recession. However, while house prices have risen – in many cases to new all-time highs – some 1.6 million homes still have negative equity since the third quarter of 2020 according to the latest data from CoreLogic.
This is about 3% of all mortgage homes nationwide.
Leaving an underwater home is an incomprehensible move, no matter how you ride it. And virtually any financial expert would advise your family to avoid this at all costs.
First, foreclosures are absolutely devastating to a home owner’s credit rating and remain on a person’s credit record for seven years. You may think what difference does this make? What if the new housing conditions don’t come true? Your family and in-laws only spent short periods of time together – this is very different from living together.
If in-laws decide they need their own space, they may have trouble qualifying for rentals with the low creditworthiness they would have had upon foreclosing the property. Are you and your husband ready to act as guarantors in this situation?
Bail is not a release card. You wrote off the possibility of making a short sale as it would hurt your in-laws’ savings, but this is what can happen in an execution.
“Depending on the laws of their state, the lender could take over the loan, sell the property, and apply for a deficiency ruling from the parents – the difference between the selling price and what was owed on the loan, plus taxes, insurance, fines and fees.” said Rick Sharga, a mortgage industry veteran and executive vice president of real estate data, RealtyTrac.
Don’t miss: I will retire soon. Should we sell our house when prices are high – and rent for two years?
Federal law states that retirement savings on company sponsored retirement accounts such as 401 (k) are exempt from attachment by creditors in the event of a default judgment. Some states extend the same courtesy to their own retirement accounts.
There are also moral and ethical considerations. The in-laws signed a deal with the mortgage lender, so it’s understandable that the father-in-law feels obligated to keep the end of the deal. In addition, research shows that foreclosures can lower the value of properties in nearby homes.
What to do instead? Well, for starters, you should all investigate whether your in-laws qualify for any form of assistance with making the necessary repairs to their home to bring it to a salable condition. If any of your in-laws are military veterans, they may be eligible for Operation Homefront. Other resources they can investigate for financial aid include the National Association of Aging Area Agencies and Habitat for Humanity.
I also believe that you should reconsider short selling and see if your in-laws’ mortgage servicer would agree to a reduced amount to pay off your mortgage. Attendants can still pursue your in-laws to get the remaining loan balance after the sale – although that depends on the state – but as I said, this also applies to real estate foreclosures.
“Another option might be a” foreclosure replacement act “whereby they would hand the house over to the bank without going through the foreclosure process, perhaps in exchange for the bank’s promise to relinquish any deficiencies, said Eric Dunn, director of National Project Litigation. Housing Law.
A short sale or a substitute act would affect your in-laws’ credit, but it would still be less severe than the blow they would receive as a result of the execution. The service technician must agree with each option.