“The Big Move” is a MarketWatch column that examines the ins and outs of real estate, from navigating to finding a new home to applying for a mortgage.
Do you 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 leave the state; however, we have not yet had to do this due to teleworking. My husband and I have two small children. Due to our teleworking, my in-laws have kept an eye on our children at our home and often stay there for days at a time.
My husband and I have asked his parents to move in once we move. In theory this is a great plan for everyone involved: free childcare for us, reduced expenses for them, and we all enjoy each other’s company.
The dilemma is that my in-laws are $ 50,000 underwater in their townhouse. The house has water penetration and foundation issues that make it only worth about $ 100,000, at best. My father-in-law is a very disciplined man and doesn’t think leaving is the right thing to do. He thinks continuing to pay the mortgage is the best plan, even if they don’t live at home.
A short sale, even if a buyer were willing to take on the problems, would be devastating to the savings they have. My husband believes that walking away and taking the credit of foreclosure is the best option. They would live with us and would no longer have the mortgage payment that hindered them.
Furthermore, my husband is the only child and the designated executor of the estate. My husband realizes that every time his father dies (he is 71 years old), the house will be his problem to manage. Should my father-in-law keep paying or leave? Are there any other options we should consider?
Your letter is an important reminder that even at a time when home values are rising at a record rate, many Americans continue to owe more on their mortgages than their homes are worth, also known as “being underwater.” on a house.
Millions of Americans have found themselves in this position in the wake of the subprime mortgage crisis that caused the Great Recession. But even as house prices have risen – in many cases to new all-time highs – around 1.6 million homes are still in negative equity as of Q3 2020, according to the most recent data available from CoreLogic
This represents about 3% of all mortgaged homes nationwide.
Moving away from a house underwater is a reckless move, no matter how you cut it. And virtually any financial expert would advise your family to avoid this at all costs.
To begin with, foreclosures are absolutely devastating to a homeowner’s credit score and remain in a person’s credit record for seven years. You may be thinking, what difference does it make? What if your new housing arrangement doesn’t work? Your family and in-laws have only spent short periods of time together, this is very different from living together permanently.
If your in-laws decide they need their own place, they may have trouble qualifying for a rental with the low credit score they would have had after the foreclosure. Are you and your husband ready to act as guarantors for them in such a situation?
Foreclosure is not a card to get out of jail for free. You’ve canceled the possibility of pursuing a short sale because it would hurt your in-laws’ savings, but that’s just what could happen with a foreclosure.
“Depending on the laws of their state, the lender could foreclose the loan, sell the property, and chase the parents for a shortage judgment – the difference between the selling price and what was owed on the loan plus taxes, insurance, fines and fees. “said Rick Sharga, a veteran of the mortgage industry and executive vice president of real estate data firm RealtyTrac.
Don’t miss: I plan to retire soon. Should we sell our house while the prices are high and rent for two years?
Federal law specifies that retirement savings in company sponsored retirement accounts such as 401 (k) s are exempt from foreclosure by creditors in the event of a default judgment. Some states extend this same courtesy to self-directed retirement accounts.
There are also moral and ethical considerations. Your in-laws have signed an agreement with the mortgage lender, so it’s understandable that your father-in-law feels compelled to keep his side of the deal. Additionally, research shows that foreclosures can sink the property values of neighboring homes.
What to do instead? Well, for starters, all of you should consider whether your in-laws qualify for any form of assistance to carry out the necessary repairs to their home to bring it to a salable state. If one of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other resources they can investigate for financial assistance include the National Association of Area Agencies on Aging and Habitat for Humanity.
I also think you should reconsider a short sale and see if your in-laws mortgage manager would agree to a reduced amount to pay off the mortgage. Servicers can still search your in-laws for the remaining balance after the loan sale, although this depends on the state, but as I said, this also applies to foreclosures.
“Another option could be a ‘deed in lieu of foreclosure’, under which they would give the house to the bank without going through the foreclosure process, perhaps in exchange for the bank’s promise to forgo any shortcomings,” he said. Eric Dunn, director of litigation at the National Housing Law Project.
A short sale or substitute deed would impact your in-laws’ credit, but it would still be less severe than the blow they would suffer from a foreclosure. And with both options, the servicer needs to agree.