‘The Big Move’ is a MarketWatch column that analyzes the intricacies of the real estate market, from browsing in search of a new home to applying for a mortgage.
Do you have any questions about how to buy or sell a home? Do you want to know where your next move should be? Send an email to Jacob Passy at TheBigMove@marketwatch.com.
Just before the pandemic, my husband took a job that required us to move to another state; however, it has not yet been necessary because of teleworking. My husband and I have two young children. Due to our teleworking, my in-laws have been watching our children at our home and they often spend days straight.
My husband and I asked his parents to move in with us as soon as we move out. In theory, this is a great plan for everyone involved: free daycare for us, reduced expenses for them and we all enjoy each other’s company.
The dilemma is that my in-laws are $ 50,000 under water in their townhome. The house has water penetration and foundation problems that make it worth only 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 that continuing to pay the mortgage is the best plan, even if they don’t live with it.
A short sale, even if the buyer is willing to take on the issues, would be devastating to any savings they have. My husband feels that leaving and they take the credit foreclosure scam is the best option. They would be living with us and would no longer have the mortgage payment hindering them.
In addition, my husband is the only son and the appointed executor of the estate. My husband realizes that whenever his father dies (he is 71 years old), his home will be a problem for him. Should my father-in-law continue to pay or leave? Are there any other options we should consider?
Your letter is an important reminder that, even at a time when the value of homes is rising at a record pace, many Americans continue to owe more on their mortgages than the value of their homes, also known as’ being under water ”in a home.
Millions of Americans found themselves in this position, after the subprime mortgage crisis that caused the Great Recession. But while home prices have gone up – in many cases, to new historic highs – about 1.6 million homes are still with negative equity in the third quarter of 2020, according to the most recent data available from CoreLogic
This represents about 3% of all foreclosed homes across the country.
Moving away from a house that is underwater is a reckless move, no matter how you do 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 life arrangement doesn’t work? Your family and in-laws have spent only short periods of time together – this is very different from cohabiting permanently.
If your in-laws decide they need a place of their own, 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 card to get out of prison. You canceled the possibility of pursuing a short sale because it would hurt your in-laws’ savings, but that’s exactly what could happen with a foreclosure.
“Depending on the laws in your state, the lender could run the loan, sell the property and go after the parents for a disability trial – 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 company RealtyTrac.
Don’t miss it: I’m planning 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) s, are exempt from pledge by creditors in the event of an infringement sentence. Some states extend this same courtesy to autonomous retirement accounts.
There are also moral and ethical considerations. Your in-laws signed an agreement with the mortgage lender, so it is understandable that your father-in-law feels obligated to fulfill his part of the agreement. In addition, research shows that foreclosures can sink property values for nearby homes.
What to do instead? Well, to begin with, all of you should explore whether your in-laws qualify for any form of assistance to make the necessary repairs to your home to bring it into a state of sale. If any of your in-laws are a military veteran, they may qualify 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 the mortgage. Agents can still go after their in-laws to obtain the remaining balance of the after-sale loan – although that depends on the state – but, as I said, this is also true for foreclosures.
“Another option could be an ‘action instead of foreclosure’, whereby they would hand the house over to the bank without going through the foreclosure process, perhaps in exchange for the bank’s promise to waive any disabilities,” said Eric Dunn, director litigation in the National Housing Bill.
A short sale or a replacement deed would affect your in-laws’ credit, but it would still be less serious than the impact they would have from a foreclosure. And with either option, you need the service provider to agree.