‘The Big Movement’ is a MarketWatch column that looks at real estate entries, from navigating in search of 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 accepted a job that required us to relocate from a state; however we have not had to so far due to teleworking. My husband and I have two young children. Because of our telecommuting, my in-laws watched our children at our home and they often stay for a few days.
My husband and I asked his parents to move in with us after we moved out. Theoretically this is a great plan for all participants: free childcare for us, reduced expenses for them and we all enjoy each other’s company.
The dilemma is that my in-laws are $ 50K underwater on their townhouse. The home has water penetration and fundamental problems that are worth it for at least about $ 100,000. My father-in-law is a very disciplined man and doesn’t think leaving is the right thing to do. He thinks paying off the mortgage is the best plan, even if they don’t live in the home.
A short sale, even if a buyer would willingly handle the issues, would destroy all savings. My husband feels that walking away and taking the credit for execution is the best choice. They would live with us and no longer have the mortgage payment preventing them.
In addition my husband is the only child and the so-called executor of the estate. My husband realizes that whenever his father dies (he is 71 years old) that the home will be his problem to deal with. Will 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 growing at a record rate, many Americans continue to owe more on their home mortgages than their homes are worth, also known as “being underwater” in a home.
Millions of Americans have found themselves in this position after the subprime mortgage crisis that caused the Great Recession. But although home prices have risen – in many cases to new all-time highs – some 1.6 million households still have negative equity since the third quarter of 2020, according to the latest available data from CoreLogic
That represents about 3% of all mortgaged homes nationwide.
Leaving an underwater home is a wrong move, no matter which way you cut it. And virtually any financial expert would advise your family to avoid it at all costs.
For starters, foreclosures absolutely destroy a homeowner’s credit, and they remain in a person’s credit file for seven years. You might be thinking what difference does it make? Well, what if your new lifestyle doesn’t work out? Your family and in-laws spent only a short time together – this is very different from constantly 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 willing to act as guarantors for them in such a situation?
Execution is not a free card to get out of jail. You canceled the option to continue a short sale, as it would damage your in-laws ’savings, but that’s exactly what could happen with foreclosure.
“Depending on the laws in their state, the lender could execute the loan, sell the property and come after the parents for a default judgment – the difference between the sale 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 out: I plan to retire soon. Should we sell our home at high prices – and rent for two years?
Federal law specifies that retirement savings in companies for retirement accounts such as 401 (k) are exempt from creditors ’guarantee in the event of a default judgment. Some states extend this same courtesy to self-directed pension accounts.
There are also moral and ethical considerations. Your parents-in-law have signed an agreement with the mortgage lender, so it is understandable that your father-in-law feels compelled to give up his end of the bargain. Further research shows that foreclosures can suppress the values of nearby homes.
What to do instead? Well, to begin with, you all need to find out if your in-laws are allowed to receive some form of help to make the necessary repairs to their home to bring it to a state of sale. If any of your in-laws are a military veteran, they may be eligible to help through Operation Home Front. Other resources they can explore for financial assistance include the National Association of Regional Agencies for Aging and Habitat for Humanity.
I also think you should reconsider a short sale, and see if your in-laws ’mortgage attorney would agree to a reduced amount to pay off the mortgage. Servants can still sue your in-laws for the remaining balance of the after-sales loan – although that depends on the state – but as I said, that also applies to foreclosures.
“Another option may be‘ action instead of foreclosure ’whereby they would hand over the house to the bank without examining the foreclosure process, perhaps against the bank’s promise to waive any default,” said Eric Dunn, director of litigation at the Project on National Housing Act.
A short sale or replacement deed would affect your in-laws ’credit, but it would still be less severe than the success they would receive from foreclosure. And with both options, you need the server to agree.