“The Big Move” is a MarketWatch column that explores the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next step 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 state; however, we have not had to do it yet due to teleworking. My husband and I have two young children. Due to our remote work, my in-laws have been looking after our children at our home and they often stay for days.
My husband and I have asked his parents to move in with us once we move in. 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 row house. The house has foundation and water penetration issues that make it only worth around $ 100,000 at best. My father-in-law is a very disciplined man and he doesn’t think walking away is the right thing to do. He thinks that continuing to pay the mortgage is the best plan, even if they don’t live in the house.
A short sale, even if a buyer were willing to take the trouble, would be devastating to your savings. My husband feels that walking away and taking foreclosure credit is the best option. They would be living with us and the mortgage payment would no longer be an obstacle.
Also, 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. Should my father-in-law keep paying or leave? Are there other options we should consider?
Your letter is an important reminder that even at a time when home values are increasing at a record rate, many Americans continue to owe more on their mortgages than their homes are worth, also known as “being under water.” in a house.
Millions of Americans found themselves in this position in the wake of the subprime mortgage crisis that caused the Great Recession. But even though home prices have risen, in many cases to new all-time highs, about 1.6 million homes still have negative net worth in Q3 2020, according to the most recent data available from CoreLogic. .
That represents roughly 3% of all mortgaged homes nationwide.
Moving away from a house that is underwater is an ill-advised move, no matter how you cut it. And virtually any financial expert would advise your family to avoid it at all costs.
For starters, foreclosures are absolutely devastating to a homeowner’s credit score and remain on a person’s credit file for seven years. You may be thinking, what difference does it make? Well, what if your new living arrangement doesn’t work? Your family and in-laws have only spent brief periods of time together, that’s very different from permanent living together.
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 after foreclosure. Are you and your husband ready to act as guarantors for them in such a situation?
Foreclosure is not a get out of jail card. You have canceled the possibility of short sale because it would hurt your in-laws’ savings, but that is exactly what could happen with foreclosure.
“Depending on the laws in your state, the lender could foreclose on the loan, sell the property, and pursue the parents for a deficiency judgment – the difference between the sale price and what is owed on the loan plus taxes, insurance, penalties and fees, ”said Rick Sharga, a veteran of the mortgage industry and executive vice president of real estate data firm RealtyTrac.
Don’t miss out – I plan to retire soon. Should we sell our house while prices are high and rent for two years?
Federal law specifies that retirement savings in company-sponsored retirement accounts, such as 401 (k), are exempt from levy by creditors in the event of a deficiency judgment. Some states extend this same courtesy to self-directed retirement accounts.
There are also moral and ethical considerations. Your in-laws signed an agreement with the mortgage lender, so it’s understandable that your father-in-law feels obligated to honor his end of the bargain. Additionally, research shows that foreclosures can sink the property values of nearby homes.
What to do instead? Well, for starters, everyone should explore whether their in-laws qualify for some form of assistance to make necessary repairs to their home and bring it to salable status. If any of your in-laws are a military veteran, they may be eligible for assistance through Operation Homefront. Other resources you can research for financial help 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 servicer would agree to a reduced amount to pay off the mortgage. Servicers can still chase their in-laws for the remaining loan balance after the sale, although that depends on the state, but like I said, that’s true for foreclosures as well.
“Another option may be a ‘deed in lieu of foreclosure,’ whereby they would hand over the house to the bank without going through the foreclosure process, perhaps in exchange for the bank’s promise to waive any deficiencies,” he said Eric Dunn, Director of Litigation. in the National Housing Law Project.
A short sale or replacement deed would affect your in-laws’ credit, but it would still be less severe than the impact they would receive from a foreclosure. And with any of the options, you need the administrator to agree.