“The Big Move” is a MarketWatch column exploring the ins and outs of real estate, from looking 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 move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Shortly before the pandemic, my husband accepted a job that required us to leave the state; however, we haven’t had to do this yet because of telecommuting. My husband and I have two young children. Because of our telework, my parents-in-law have kept an eye on our children at our home and they often stay for days on end.
My husband and I asked his parents to move in with us once we moved. In theory, this is a great plan for everyone involved: free childcare for us, less cost to them, and we all enjoy each other’s company.
The dilemma is that my in-laws have $ 50,000 underwater in their town home. The house has water penetration and foundation issues making it only worth about $ 100,000 at best. My father-in-law is a very disciplined man and doesn’t think running away is the right thing to do. He thinks continuing to pay the mortgage is the best option, even if they don’t live in the house.
A short sale, even if a buyer were willing to address the issues, would be devastating to the savings they have. My husband believes that running away and taking the credit of foreclosure is the best option. They would live with us and would no longer have the mortgage payment hindering them.
In addition, my husband is the only child and the said executor of the estate. My husband realizes that when his father dies (he’s 71), the house will be his problem. Should my father-in-law keep paying or should I run away? Are there other options we should consider?
Your letter is an important reminder that even at a time when the value of a home is growing at a record rate, many Americans still owe more on their mortgage than their home is worth, also known as being ‘underwater’ on a home .
Millions of Americans found themselves in this position in the wake of the subprime mortgage crisis that sparked the Great Recession. But while house prices have soared – in many cases to new record highs – as of the third quarter of 2020, about 1.6 million homes are still in negative equity, according to the most recent data from CoreLogic.
That represents about 3% of all mortgage homes across the country.
Running away from a house that is underwater is an unwise move no matter which way you cut it. And practically any financial expert would advise your family to avoid this at all costs.
For starters, foreclosure sales are absolutely devastating to a homeowner’s credit score, and they remain in a person’s credit record for seven years. You may think: what difference does it make? What if your new living situation does not work? Your family and in-laws have only spent a short amount of time together – that’s very different from living together permanently.
If your in-laws decide they need a home of their own, they may struggle to qualify for a rental because of the low credit score they would have after the foreclosure. Are you and your husband willing to vouch for them in such a situation?
Foreclosure is not a card to get out of prison. You’ve written off the ability to pursue a short sale because it would hurt your in-laws’ savings, but that’s exactly what can happen with a foreclosure.
Depending on the laws in their country, the lender may cancel the loan, sell the property, and chase the parents for an assessment of deficiencies – the difference between the sale 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 company RealtyTrac.
Don’t Miss: I plan to retire soon. Should we sell our house when 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 creditors’ seizure in the event of a deficiency judgment. Some states offer the 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 is understandable that your father-in-law feels obliged to hold up on his end of the bargain. In addition, research shows that foreclosures can lower the property values of nearby homes.
What should you do instead? To begin with, you should all investigate whether your in-laws qualify for any kind of assistance to make the necessary repairs to their home to bring it into a salable condition. If one of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other sources they can research for financial aid 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 lender would agree to a reduced amount to pay off the mortgage. Service providers can still go after your in-laws for the remaining balance of the loan after the sale – although that depends on the state – but as I mentioned, that includes foreclosure sales.
“Another option could be a ‘deed instead of foreclosure sale,’ where they would hand over the house to the bank without going through the foreclosure process, perhaps in exchange for the bank’s promise to refrain from any shortcomings,” said Eric Dunn, litigation director. at the National Housing Law Project.
A short sale or bill of sale would affect your in-laws’ credit, but it would still be less severe than the blow they would receive from a foreclosure. And with both options, the administrator must agree.