The Big Move is a MarketWatch column that looks at the inside and outside of real estate, from navigating the search for a new home to applying for a mortgage.
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.
Just before the pandemic, my husband accepted a job that required us to move out of state; however, we haven’t had to do that yet because of teleworking. My husband and I have two young children. Due to our teleworking, my parents-in-law have been watching our children in our home and often stay over for days at a time.
My husband and I have asked his parents to move in with us, after we move. In theory this is a great scheme for everyone involved: free childcare for us, lower costs 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 foundation issues that make it only worth about $ 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 believes that continuing to pay the mortgage is the best plan, even if they are not living in the home.
A short sale, even if a buyer was willing to take on the issues, would be devastating to whatever savings he has. My husband feels that walking away with them taking the credit credit of closing is the best option. They would live with us and the mortgage payment is no longer stopping them.
In addition, my husband is the only named child and executor of the estate. My husband realizes that whenever his father dies (he is 71), home is his issue. Should my father-in-law continue to pay or walk away? Are there other options we should be considering?
Your letter is an important reminder that even at a time when home values are rising at an all-time high, many Americans still owe their mortgages more than their homes are worth, called also “underwater” on a home.
Millions of Americans found themselves in this situation as a result of the subprime mortgage crisis that caused the Great Depression. But while home prices have risen – in many cases to new all-time highs – about 1.6 million homes are still in negative equity in the third quarter of 2020, according to the latest data available from CoreLogic
CLGX,
+ 0.38%.
That represents about 3% of all mortgage homes nationwide.
Walking away from an underwater home is an ill-advised move, no matter which way you cut it. And practically any financial expert would advise your family to avoid it at all costs.
For starters, foreclosures are completely destructive to a homeowner’s credit score, and remain in an individual’s credit file for seven years. You may be wondering, what difference does it make? Well what if your new living arrangement doesn’t work out? Your family and in-laws have only been spending short periods of time together for short periods – that is very different from living together permanently.
If your in-laws decide they need their own place, they may have difficulty qualifying for rent with the low credit score they have after the closing. Are you and your husband prepared to act as guarantors for them in such a situation?
Closure is not a jail exclusion card. You have eliminated the possibility of chasing a short sale because it would hurt your ‘in-laws’ savings, but that’s exactly what could happen with closing.
“Depending on the laws in their state, the lender could foreclose on the loan, sell the property, and pursue the parents for a default judgment – the difference between the sale price and what was owed on the loan along with taxes, insurance, fines and fees, ”said Rick Sharga, a mortgage industry veteran and executive vice president of real estate data firm RealtyTrac.
Don’t miss: I plan to retire soon. Should we sell our home while prices are high – and rent it for two years?
Federal law states that retirement savings in company-sponsored retirement accounts as 401 (k) s are exempt from being credited by creditors in the case of a default judgment. Some provinces 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 felt obligated to hold his end of the deal up. Also, research shows that foreclosures can sink the property values of nearby homes.
What to do instead? Well, for starters, you should all explore whether your in-laws qualify for any kind of assistance in carrying out the necessary repairs to their home to bring it into a state of sale. If either of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other resources they can research for financial support 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. Servants can still chase your laws for the remaining balance on the after-sale loan – though that depends on the state – but as I said, that also applies to foreclosures.
“Another option could be an ‘action instead of closing,’ where they would surrender the house to the bank without going through the closing process, perhaps in exchange for the bank’s pledge to waive any shortfall,” said Eric Dunn, director of litigation. in the National Housing Law Project.
A short sale or deed instead would affect your ‘in-laws’ credit, but would still be less serious than the blow they would take from closing. And with either option, the servicer needs to agree.
What to do if you are underwater on your mortgage?
They could also always see if the lender would be willing to forgive them a portion of the main loan balance. It’s unlikely, but the lender may be willing to be flexible – foreclosures are expensive for mortgage companies, after all.
- Before your family makes any decisions, I highly recommend discussing your case with a HUD-certified real estate attorney or housing counselor. Those individuals could help negotiate the best possible solution with your ‘laws’ lender to get them out of this situation in a better shape. I wish your family good luck.
- Read more: I’m retired and I don’t live to see my mortgage paid off. Should I refinance to reduce my monthly payment?
- What are your options if your mortgage is underwater?
- Option 1: Stay at home and work to build greater fairness. …
- Option 2: Refinance your mortgage. …
Can I refinance if my house is underwater?
Option 3: Sell your house and use your savings to pay the amount you still owe. …
What happens if you sell a house for less than you paid?
Option 4: Sell your home through a short sale process. …
How does foreclosure happen?
Option 5: Foreclose on your home.
Do banks want to foreclose?
You will not be able to refinance your loan if you are underwater. Most lenders need to have some equity in your property before you refinance.
Do you get any money if your house is foreclosed?
If you sell your home, a due clause on the value of your mortgage is triggered, giving your lender rights to demand a full loan repayment. If your home is being sold for less than you owe, your lender may demand the difference from you.
Can you still live in your house after foreclosure?
Closures occur when a lender fails to pay its mortgage payments and the home must be repossessed by the lender or mortgage investor. Closures can also occur when the homeowner fails to pay his property taxes or homeowners association fees.
