‘The Big Move’ is a MarketWatch column that looks at in and out 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? 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 move out of the state; however, we have not had it yet due to telecommuting. My husband and I have two small children. Because of our teleworking, my in-laws have been keeping an eye on our children in our homes, and they often stay for several days at a time.
My husband and I have asked his parents to move in with us once we have moved. In theory, this is a good 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 at their townhouse. The home has water intrusion and foundation problems that make it worth only around $ 100,000 at best. My father-in-law is a very disciplined man and does not think it is the right thing to go away. He thinks that continuing to pay mortgages is the best plan even if they do not live in the home.
A short sale, even if a buyer would be willing to take on the problems, would be detrimental to the savings they have. My husband feels that it is the best solution to go away and that they are taking the credit layer for foreclosure. They would stay with us and no longer have an obstacle to the mortgage payment.
In addition, my husband is the only child and the named executor of the estate. My husband realizes that when his father dies (he is 71) that home will be his problem to deal with. Should my father-in-law continue to pay or walk away? Are there other options we should consider?
Your letter is an important reminder that even at a time when home values are rising at a record pace, many Americans continue to owe more on their mortgage than their home is worth, also known as “being underwater” in a home .
Millions of Americans found themselves in this position in the wake of the subprime mortgage crisis that caused the Great Recession. But even though house prices have risen – in many cases to new all-time highs – 1.6 million homes are still in negative equity from the third quarter of 2020, according to the latest available data from CoreLogic
It represents approx. 3% of all mortgaged homes nationwide.
Walking away from an underwater home is bad advice no matter which way you cut it. And virtually any financial expert will advise your family to avoid it at all costs.
First, foreclosures are absolutely devastating to a homeowner’s credit score, and they remain in a person’s credit file for seven years. You might be thinking, what difference does that make? Well what if your new living arrangement does not work? Your family and your in-laws have only spent short periods of time together – it is very different from permanent cohabitation.
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 free out of jail-free card. You have written off the possibility of pursuing a short sale because it would hurt your in-laws’ savings, but that’s exactly what can happen with a foreclosure.
“Depending on the law in their state, the lender could foreclose on the loan, sell the property and sue the parents for a defective judgment – the difference between the sale price and the debt of the loan plus tax, insurance, fines and fees,” said Rick Sharga, a veteran of the mortgage industry. and CEO of real estate data firm RealtyTrac.
Do not miss: I plan to retire soon. Should we sell our home while prices are high – and rent for two years?
Federal law specifies that pension savings on company-supported pension accounts such as 401 (k) s are exempt from garnishing creditors in the event of a defective judgment. Some states extend the same courtesy to self-managed 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 end his termination of the agreement. Plus, research shows that foreclosures can lower property values for nearby homes.
What should I do instead? To begin with, all of you need to find out if your in-laws are qualified for any kind of help to make the necessary repairs to their home to bring it up in a salable condition. If one of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other resources they can explore for financial assistance include the National Association of Area Agencies on Aging and Habitat for Humanity.
I also think you should consider a short sale and see if your in-laws mortgage lender will accept a reduced amount to pay the mortgage. Servicers can still go after your in-laws for the remaining balance of the after-sales loan – even if it depends on the state – but as I said, that also applies to foreclosures.
“Another option could be a ‘deed instead of foreclosure’, whereby they would hand over the house to the bank without going through the foreclosure process, perhaps in return for the bank’s promise to waive any defect,” said Eric Dunn, director of litigation. . by the national housing law project.
A short sale or a deed instead would affect your in-laws’ credit, but it would still be less serious than the hit they would get from a foreclosure. And with both options, you need the service company to agree.