‘The Big Move’ is a MarketWatch column that looks at the ins and outs of real estate, from navigating a new home search to applying for a mortgage.
Do you have questions about buying or selling a home? Do you want to know where your next step is? Send an email to Jacob Passy at TheBigMove@marketwatch.com.
Shortly before the pandemic, my husband accepted a job that required us to move; However, we haven’t had to do it because of the telework. My husband and I have two small children. Because of our telework, my parents-in-law have watched our children in our house and they often stay overnight for days.
My husband and I had asked his parents to come live with us, once we moved. In theory, this is a great plan for all involved: free childcare for us, reduced costs for them, and we all enjoy each other’s company.
The dilemma is that my in-laws received $ 50K underwater in their house. The house has water and foundation penetration problems that make it only worth around $ 100,000, at best. My father-in-law was a very disciplined man and didn’t think leaving home was the right thing to do. He thinks resuming mortgage payments is the best plan, even if they don’t live at home.
A short sale, even if the buyer is willing to deal with the problem, will destroy any savings they have. My husband felt that leaving and risking foreclosure on credit was the best option. They will stay with us and the mortgage payments will no longer stand in their way.
In addition, my husband is the only child and the name of the executor of the inheritance. My husband realized that every time his father died (he was 71 years old), home would be the problem he had to deal with. 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 at a time when home values are rising rapidly, many Americans continue to owe more on their mortgages than the value of their homes, also known as “being under water” on a home.
Millions of Americans found themselves in this position after the subprime mortgage crisis that led to the Great Recession. But even though house prices have risen – in many cases to new all-time highs – around 1.6 million homes are still in negative equity in the third quarter of 2020, according to the most recent data available from CoreLogic.
That represents about 3% of all mortgaged homes nationwide.
It is wrong to move away from a house that is underwater, no matter how you cut it. And almost any financial expert will advise your family to avoid it at all costs.
For starters, foreclosures literally destroy a home owner’s credit score, and they stay on someone’s credit file for seven years. You may be thinking, what’s the difference? What if your new living arrangements don’t work out? Your family and your in-laws spend only a short time together – that’s very different from living together permanently.
If your in-laws decide they need a place of their own, they may have a hard time qualifying for rent with the low credit score they had after foreclosure. Are you and your husband ready to act as their guarantor in this situation?
Foreclosure isn’t out of the jail-free card. You have eliminated the possibility of pursuing a short sale because it would hurt your in-laws’ savings, but that can only happen with foreclosure.
“Depending on the laws in their state, lenders can foreclose on loans, sell property, and go to parents to assess the deficiency – the difference between the selling price and what is owed on the loan plus taxes, insurance, fines and fees,” Rick said. Sharga, mortgage industry veteran and executive vice president of real-estate data company RealtyTrac.
Don’t miss: I plan to retire soon. Should we sell our house when prices are high – and rent it for two years?
Federal law provides that retirement savings in company-sponsored retirement accounts such as a 401 (k) are exempt from withholding by creditors in cases of deficiency assessments. Several states are extending this same courtesy to self-retirement accounts.
There are also moral and ethical considerations. Your father-in-law signed an agreement with the mortgage lender, so it’s understandable that your father-in-law felt obliged to stick with the deal. Additionally, research shows that foreclosure can drown the property value of nearby homes.
What to do? Now, for starters, you should all find out if your in-laws qualify for any form of assistance to make the necessary repairs to their house to bring it to a marketable state. If one of your in-laws is a military veteran, they may qualify for assistance through Operation Homefront. Other resources they could investigate for financial assistance include the National Association of Area Agencies on Aging and Habitat for Humanity.
I also think you should reconsider the short sale, and see if your in-law’s mortgage provider agrees to reduce the amount to pay off the mortgage. Service providers can still chase your in-laws for the remaining balance of the post-sale loan – although it depends on the state – but as I said, that also applies to foreclosures.
“Another option might be a ‘deed in lieu of foreclosure,’ in which they will hand over the house to the bank without going through a foreclosure process, perhaps in exchange for a bank promise to put aside any shortages,” said Eric Dunn, director of litigation at the National Housing Law Project. .
A short sale or replacement deed will affect your in-laws’ credit, but that’s still less severe than the blow they’ll receive from foreclosure. And either way, you need the service provider to agree.