Strategic Mortgage Default

The value of property is hopelessly underwater, and will take 10+ years to reach the loan value. Should I allow a default?

I was not able to continue making payments on my mortgage and home equity payments due to an income reduction in 2009. I attempted a loan mod, but was told I make too much. I then tried a short sale, but the 2nd mortgage holder would not agree to the amount that the 1st mortgage holder was willing to pay them. I have since gotten a new job. I still cannot make the payments on the home equity, but can afford to pay the 1st mortgage. Also, the 2nd mortgage holder has charged off the loan. I owe $315K on my 1st and $205K on my 2nd, and my home is worth $220K. Is there any benefit to getting my 1st mortgage current? Experts predict it will take at least 10 years to get the home values back to what I owe. Should I just walk away or get current on my 1st mortgage and work out a settlement plan with the 2nd mortgage holder?

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  • Two schools of thought have emerged regarding the morality of strategic default.
  • Is it immoral to walk away from a mortgage you can afford?
  • Or, is it just smart economically?

What you are really asking about is called strategic mortgage default, where a homeowner voluntarily walks away a mortgage because the balance of the mortgage(s) is greater than the fair market value of the home.

Two schools of thought have emerged regarding the ethics or morality of strategic mortgage default. Former Treasury Secretary Henry M. Paulson Jr. is quoted in The New York Times saying that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligation."

On the other hand, Brent T. White, a University of Arizona law professor and author of Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis argues that the deleterious effects of foreclosure are less than people expect, and that morals and ethics should not enter into an economic decision. After all, banks use economics and not emotion when making loans, and banks are not averse to breaking leases for office space when it is to their benefit. Therefore, I will leave the ethics question up to you to decide.

If a modified mortgage will cause you financial distress, then there is no moral or ethical issue to ponder -- you must walk away from the deal and the property. If the deal is bad, consider a short sale or deed in lieu or foreclosure.

You did not mention foreclosure, but would be remiss if I did not point out the Bills.com resources Judicial Foreclosure, Foreclosure Advice, and Stop Foreclosure as sources to learn more about foreclosure.

Recommendation

You mentioned economic reasons to allow a strategic default, which are compelling. However, you do not mention intangible reasons to stay in the property. For example, if you have minor children who attend a great neighborhood school, then that is a benefit to staying. Also, if the property is your dream house, in a great location with neighbors who a picture-perfect, then your chances of recreating that neighborhood synchronicity are low. Living in a great house that you love disfavors strategic default.

On the other hand, if the neighborhood is in general decline, you have no attachment to the area, and your children (if any) would be happier elsewhere, then the intangibles are in favor of a strategic default.

Before you settle on a strategic default, be sure to educate yourself on the Home Affordable Foreclosure Alternatives Program (HAFA), which is a federal program that defines standards for short sales.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

41 Comments

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  • 35x35
    Oct, 2012
    Keith
    Bill, I am considering a Strategic Default. The property is in my name and was my primary residence until I remarried in the last 6 months. I currently have the house listed for $100K less than the mortgage balance. My wife owns her home which she received as part of a divorce settlement and is afraid that my mortgage company would come after her and force the sale of her home where we live now. She is the sole owner of her house and I am the sole owner of mine. Is there a risk to her?
    0 Votes

    • 35x35
      Oct, 2012
      Bill
      You indicated you reside in New Jersey, which is not a community property state. In common law states like New Jersey, spouses are generally not responsible for each others debts. (Exceptions apply for medical and related debts in some states.) However, I am not a New Jersey lawyer, and my exposure to New Jersey law is limited, so I recommend you consult with a New Jersey lawyer who has bankruptcy experience for a more authoritative answer. I am not suggesting bankruptcy is the answer to your issue here, but a New Jersey bankruptcy lawyer will know the debt-related laws backwards and forwards and will help you understand your options for resolving the $100,000 deficiency balance should you decide to strategically default.
      0 Votes

  • 35x35
    Jul, 2012
    Georgia
    Hi Bill, We bought a house in Atlanta, Georgia in '05 for $575,000. We had to move to another state because of a job over a year ago and have been trying to sell or rent the house since then with no luck. We have 1 mortgage and owe $400,000 or so on it. The house realistically is probably worth $375,000 or a little less now. We can barely afford paying the mortgage and the rent of our current place now, frequently having to dip into savings. That is just painful! We do have some assets, and do not want to jeopardize those. What would you recommend doing? I am getting panicy, as the real estate market in Atlanta does not seem to be recovering at all. Thanks in advance!
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      First, check out if you are eligible for a HARP mortgage refinance. Perhaps a 30 year loan at a lower interest rate will help lower your payment to a more affordable one.

      I recommend that you speak with your current lender regarding available foreclosure alternatives, including loan refinance, loan modification and short sales. Check out your budget and cash flow. Explain to the lender your capabilities and your desire to pay off your loan with reasonable payments, based on your financial situation. If you do decide to do a short sale, then you will need to negotiate a settlement for the deficiency balance. If correctly done this will not hurt your credit score.

      Also, speak with a local real estate agent to receive realistic rental and sale prices. Perhaps by renting at a real market price you will be able to afford the mortgage payments.
      0 Votes

  • 35x35
    May, 2012
    Greg
    Bill I have 2 rental properties which are both underwater....property one is valued at $30000 and I owe $60000....property 2 is valued at $45000 and I owe $82000. I was considering doing a short sale on both properties but heard that a forclosure would be better since both homes are rentals. I was told that Fannie Mae and Freddie Mac are buying most foreclosed properties and paying off the mortgages to the banks and in such would create no financial obligation to pay back the bank or incur tax consequences. (I have estimated that in a short sale, I would owe approx $15000 in taxes after my write-offs.) The only downfall would be a major hit on the credit report which I could handle since the car I am driving is newer and I have a principal residence. What uis your thinking?
    0 Votes

    • 35x35
      May, 2012
      Bill
      I am not aware of a program whereby you would go through a foreclosure on investment property without negative consequences. I suggest that you verify with your lender if such a program really exists. Both a short sale and foreclosure will negatively effect your credit score, although in general a foreclosure is considered more damaging. I recommend speaking to your lender and negotiating a short sale and settlement on the deficiency balance.
      0 Votes

  • 35x35
    Apr, 2012
    Sandy
    I have a question. My husband and I bought our house in 06 for $340,000 and now it is worth $220,000. We refinanced last year at a really high rate since we are so far under water. We pay 7% interest and in 4 years that interest is going up to 13%. We can just barely afford our mortgage now and we can DEFINITELY now afford our loan in 4 years. Do you recommend getting out now or waiting? My parents have offered to loan us some money so we can refinance but that would just mean sinking in another $100,000 into a house were we already lost $120,000 (not to mention the $30,000 in remodeling expenses). So we would have a mortgage to the bank and my parents hard earned retirement money. I don't see our house going up much more in the future. It already came up to $220,000 and looks to be staying there. Our house is small and we would like to move out if possible. I drive 90 miles a day to work and it costs about $450 a month in gas. My parents are really against foreclosures and I would appreciate some professional advice. It just seems like a poor investment just to "save face"
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      I really dislike the idea of someone pouring their retirement savings into a child's upside down mortgage. I understand the moral argument here, "A contract is a contract. Promises made, promises kept. Home ownership is not speculation," and so on. The facts as you presented them are:
      • The house's value is $220,000 and will probably stay $120,000 underwater for the foreseeable future.
      • The house is too small for your needs
      • The house is too far from your place of work
      • The existing loan will eat you in the coming years
      • You cannot refinance without bringing a huge amount to the table

      Your facts make an excellent argument in favor of a strategic default. No one likes strategic default, but the choice of raiding a parent's retirement fund is an even worse idea.

      My advice? Talk to a lawyer in your state who has real property experience to learn more about your state's anti-deficiency laws, if any, and your options for handling the deficiency balance.

      0 Votes

  • 35x35
    Apr, 2012
    tom
    hello Bill, first - thanks for all this valuable info. briefly, officially divorced 1 year ago. Judge decreed all rights/responsibilities of the house to me, although we are both still on BofA mortgage. I am unable to just 'remove' her from the mortgage. My ex and me have both agreed to strategically default on our mortgage as it is hopelessly underwater. There is also a HELOC of about 20K. I am just about to not pay my fist ever missed/late payment in a few weeks. I have also attempted loan mod/HARP, but the bank does not assist willingly with me being up to date on mortgage. I am now committed to 'living off the grid' by this time next year. (Meaning that I will be 'on the road' and probably not in the USA) question 1: I understand in RI BofA can pursue collection and levy against my bank accounts for the HELOC amount. Should i also enter into bankruptcy after foreclosure proceeding begin? question 2; Will BofA continue to pursue collection from my ex, because she is still on the mortgage - even though the judge has decreed she has no obligation to the house? Observation: in for a penny... I had intended to get my credit card balances down to zero before 'leaving'. 2 birds one stone? this way I avoid paying off credit cards myself. I look forward to your thoughts. Thank you in advance. Sincerely, Tom
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      Removing a spouse's name from a joint mortgage is a common question among Bills.com readers.
      1. See the Bills.com anti-deficiency page to learn more about the recourse/non-recourse laws for home loans in your state. Regarding bankruptcy, I do not see if filing it before or after a foreclosure will make a significant difference in terms of your liability. However, I hasten to add I have a tiny window into your situation, and time spent with a bankruptcy lawyer may result in a different conclusion.
      2. Generally speaking, one joint debtor filing bankruptcy does not wipe out the liability of another (there are exceptions to this rule in community property states for spouses in some situations). The divorce decree binds you and your ex-spouse, but is not meaningful to your joint creditors. In other words, a divorce decree does not change your contractual obligations to your lenders.

      I cannot say if your home loan lender will forgive any deficiency balance or pursue one or both of you.

      Regarding your credit card debt, discuss this with a bankruptcy lawyer.

      0 Votes

  • 35x35
    Apr, 2012
    Shelia
    My husband and I have had our house listed with a realtor for two months now and have a few people walk through but had not offers. I am currently living in the house with my children but my husband moved out of state for a better job. The children and I plan to move to where my husband is and we plan to rent for about a year (right now my husband is living with relatives but there is not room for our whole family to move in with them). Our market value is $185,000, we owe $167,000 and we are asking $179,000. My concern is that we may have to take a lower offer to sell our house and after closing cost, we may end up owing money to sell (as much as $10,000). If we didn't have to pay the realtor or closing cost we would be ok to lower the price to just what we owe but we have a 6 month contract with the realtor (until the first of Ausgust). Sadly enought we really can't even afford to be short even the smallest amount going into closing because we need all of our savings just to move the family and get set up in another rental house. We don't want to hurt our chance of getting another mortgage in a year or so but we don't know what our best options are either. Can we get out of our contract with the realtor or should we just continue on until it expires. I know we cannot afford a mortage payment here and a rent payment where we are moving to. Our realtor did ask us if we would be interested in the option of having someone lease our home but I would really just like to know that we are done with it and can concentrate on getting moved in and settled at our new location. I am afraid if we lease our home we will not be able to ask the full amount of our mortgage payment and that would need to be considered when looking at rent options where we relocate to as well. Or we to a point where we should consider deed in lieu of forcloser or maybe a short sale (if the bank will even agree)? My children and I will be moving out of state to be with my husband in the middle of June and we will need to have a place to rent by at lease the first of July. My husband and I just don't know what is the best direction to take at this point. Please point me to the souces that will be the most benefit in my situation. Thank you so much for your time.
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      If you have a contract with the realtor, then your ability to break the contract and the remedies available to the realtor should be specified in the contract. If you walk away from the house, it might be sold for much less than you can get for it if you try to sell it yourself. The deficiency balance (the amount you owe the bank after the sale) might still be collectible, depending on the anti-deficiency laws in your state. In any case a foreclosure will greatly damage your credit. I recommend that you sit down with the realtor and try to work out a program where you can sell the property and pay all your debts.
      0 Votes

  • 35x35
    Mar, 2012
    Mike
    Hello Bill, I currently live in the 2BR/2BA condo I bought in San Jose, CA, in March 2005 for $415k. I bought it with two loans comprising 80% on the first, and 15% on the second, with the remaining 5% down. Since purchasing the condo in March 2005, I got married in 2008 and we had our first child in 2010. It's now 2012 and several units in my complex have gone to foreclosure or short sale with the ultimate sales price hovering around $230K. That's a 45% loss. Currently, there are 3 units in my complex that are in default and/or foreclosure. We have outgrown this condo and will have a second child in 2013. I have excellent credit and can afford to make my payments. However, we plan to move back to the east coast in approximately 3 years. I've considered a short sale, but figure why should I pay another $13K in realtor commissions on a property I've lost so much value in and in addition to improvements I've made (kitchen, bathroom, etc.). I figure if I walk away, I can begin the process of rebuilding my credit and hopefully have some sort of credit by the time we move in approximately 3 years. Also, if it closes before 2012, I won't have to pay income taxes on the cancelled debt. I just wonder whether a short sale or strategic foreclosure is the way to go. To get back to even, I'd need an 80% increase in market value. Also, I've read from the latest study by Fair Isaac that on a credit score basis, there is minimal difference in your credit score between short sale and foreclosure. Is there a difference in the length of time to recover from each? Thanks for listening and sorry for the long post. It keeps me up late at night.
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      You are not the only one losing sleep. What happens if homeowners who are hopelessly underwater decide that a strategic default is a better choice than living in a property where they will never see it above water? That is why some economists have proposed a write-down of all home loans on underwater properties. The argument is lenders will have to write-down these properties eventually, so we as a nation might as well do it all at once in an orderly fashion. My macro-economic digression does nothing to answer your question, however.

      Let us assume your property values will not rebound significantly anytime soon. If we start with that assumption, and you plan to leave the area, one option is to rent the property if your condo association allows rentals. If not, then you face a severe cash-flow situation, as opposed to merely a terrible cash-flow situation if you become a landlord.

      Your analysis of the difference between a short sale and a foreclosure is accurate, but completely non-sensical from my perspective. A short sale is a controlled landing, whereas a foreclosure is an uncontrolled crash. If credit scores are predictive statistics, then it is quaint and old-fashioned for Fair Isaac & Co.'s statisticians to equate the two given the state of today's real estate market. In my humble opinion, a short sale should be treated as a positive event that raises a person's credit score. Borrowers should be rewarded for choosing an alternative to foreclosure because that shows fiscal and legal responsibility. Fair Isaac should not punish people who avoid foreclosure.

      If you are locked into leaving the area in three years, and there is no prospect for a rapid up-tick in the value of your property soon, you would be wise to bail out now. You and your spouse can spend the next three years rebuilding your credit score(s), and saving all you can for a down-payment.
      0 Votes

  • 35x35
    Mar, 2012
    Andrea
    Hi, 5 years ago my husband and I purchased a track home in California. The home was $362,000, and it was our first home. We had saved for a very long time, and we put $70,000 down and got a fixed rate mortgage. The homes were new, and they were ALL serviced by Country Wide. When we all started moving in, it became apparent right away that most (or all) of our neighbors could not really afford the homes. Lawns were not watered, etc. Within 2 years, most of the houses were empty. Many still are. My husband and I have held on for 5 years, and sadly the homes around us are selling for $130,000. We still owe $260,000. We can still afford the mortgage, but we want out. We now have a son, the neighborhood is not great, and we are tired of living in an abandoned community. What options do we have? Thanks!!!
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      My guess is you know your options:
      • Short Sale
      • Strategic Default (discussed above)
      • Stay and hope it gets better

      Based on the circumstances you described, none of these options are good. If you short sell your home or allow a strategic default, your credit score will suffer, and you will lose any chance of ever recovering the down payment you put into the house. However, if you stay, it will almost certainly be years before the market values in your area recover. And who knows? Your neighborhood may flourish in the next five years. Or, it may get worse.

      My advice? Step back and look at the development with outsider's eyes. Look at the area's economy. Is today the low point for your local economy and the life of the development? If so, then hang on. If, however, you live in an area where jobs have gone elsewhere, and properties in your development will continue to slide in value for the foreseeable future, then get out now before things get worse. Consult with a lawyer who has experience in real property law to understand your rights and potential liability for the deficiency balance.

      0 Votes

  • 35x35
    Mar, 2012
    Cinda
    I have a house I bought 4 years ago, and I have a leaky roof and chimney that needs to be replaced. I have a 25K estimate and that is only for half the roof. I can afford the mortgage payments but can't get any money to repair the roof because I'm negative equity about 40K. Most banks will only lend about 10K - 15K for a home improvement loan and that payment will put me over my budget especially with soaring energy costs. I'm thinking about walking away since I don't want to live in the area anymore because jobs are scarce. The house has been on the market since last spring and no one has even looked at it and even if I lower the price who is going to buy it knowing they are facing somewhere between 25K and 40K to fix the roof. I have a really good credit score and good income and I'm in my early 50's. I'm thinking of down sizing and cutting my loses. Any suggestions?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      First, find out if your loan is a recourse or non-recourse loan. If it is a non-recourse loan, you can walk away with only damaged credit and not with personal responsibility for the deficiency balance. Also check out your state's anti-deficiency laws.

      If you are liable for any deficiency balance, should you choose to walk away, you should try negotiating a short sale with your lender, attempting to get any deficiency balance forgiven. Other than that, you are facing collection efforts from your lender, the effects of which will be based on your income, assets, and the state collection laws where you live.
      0 Votes

  • 35x35
    Feb, 2012
    Sara
    I live in Oregon and have owned my house for 13 years. Refinanced it in 2008 for a better interest rate then I had and did get some cash out. I lived there until I got married in 2010 now I live in my husbands home and my friend rents out my house. I am losing about 900$ a month and am about 50,000$ underwater. It is an older home and need some repairs on the roof, a new furnace and electrical work.. I don't know if I should just walk away try deed in lieu of foreclosure or what. And would I be taxed on the difference since I got cash out and it's not my primary residence now? Thanks
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Strategic default may be an option. However, you first need to determine whether you would be liable for any deficiency balance that remains on the mortgage. Oregon has anti-deficiency laws that generally make it so lenders can't obtain a deficiency judgment on residential property. Check with an attorney, to see if your loan is one that leaves the lenders without the ability to collect. If you can't walk away, look into a short sale or a deed in lieu of foreclosure.

      If no debt is forgiven, then the tax issue is moot. If it turns out that mortgage debt is forgiven, you may be able to benefit from the Mortgage Forgiveness Debt Relief Act and not pay taxes on any debt that is forgiven. It is not clear exactly how the IRS is defining the primary residence requirement. However, many tax experts believe that it will be similar to the requirement for capital gains exemptions for a primary residence, that you have to have lived in the home for at least two of the past five years. Please check with an tax professional, to get his or her opinion.
      0 Votes

  • 35x35
    Feb, 2012
    Charles
    Hi, in the boom of the economy I bought a rental home and a primary residence. As is the case with many people I'm now under water on both. On the rental home I owe 103k and houses have been selling in the 50k range so renting the house out for an the amount which I need to make the payment has become difficult. On my primary I owe 163k and it's worth in the 140k's. I have not lost my job but these are both bad investments at this point and I feel putting money into a negative "asset" is not a good investment. I was thinking of purchasing another home which we will be a home that we can be in for years to come and then attempting to rent my current primary home as well as my rental. If I'm unable too then I will at that point stop making payments on the other homes because we are in the home that we want to be in. Will I be breaking any laws by doing this or is the worst case they sue me for the differences on the loans and at that point I will need to file for bankruptcy?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Strategic mortgage default is not a crime — it is a breach of contract, which is a civil matter. What you described is not illegal, unless you intend to include false information in your loan application.

      The key issue here is not a legal question, but whether you qualify for another home loan.
      0 Votes

    • 35x35
      Feb, 2012
      Charles
      Thanks for the response. I will not be providing any false information on the new application and the reason why I still qualify is because I do have a renter in my home and I have had good rental income the In a case of bankruptcy are "strategic defaults" looked at differently than a real hardships bankruptcy?? Thanks again
      0 Votes

  • 35x35
    Feb, 2012
    Sandra
    Hello Bill, Here is our situation. My husband and I were first-time homebuyers, and bought a home in Georgia, in August 2005 with an interest-only mortgage (we were told the payments would be cheaper and we could refinance in about 2 years). My husband went back to school in Jan 2007 and I lost my job in June 2007, by November 2007 we were unable to make our payments, when our rate adjusted an mortgage jumped about $300 more a month. Long story short, with help from our families were able to avoid a foreclosure, and were able to do a loan mod, however, it was still an interest only mortgage. So here we are in 2012 and we are still making the monthly interest-only payment of $1198 on a $139K home that now has a balance of $145K is worth about $70K. What should we do? We cannot really show hardship, but we really want to move to another home.
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Being so far underwater, you options are limited. Check to see if you are eligible for the HARP 2.0 loan. If not, then speak again with your current lender. It sounds like you are paying a very high interest rate. If you walk away from loan, then you will most likely be liable for the deficiency balance. Your options are as follows:
      1. Negotiate a modification with the lender. Speak about doing a fixed rate mortgage for as few years as possible, at a rate closer to today's rates. This will be advantageous to you and the lender, because it will reduce the balance of the loan and the risk of the lender.
      2. Attempt to negotiate a short sale with the lender, including an agreement resolving the deficiency balance.
      0 Votes

  • 35x35
    Feb, 2012
    Alex
    We own two homes in California. The second home is our primary residence, the first home is now a rental. The rental was our home, but when we needed space and decided to buy a new property we could not sell our original home for what it is worth. A short sale would have made purchasing a new home impossible. We are barely able to make the payments on the rental property. We are expecting a baby and with new expenses that will make payments even tougher. In addition, the rental property will soon need many repairs to the roof and heating/AC that we will not be able to afford to make. The first house is about $150K under water, so continuing to make payments on it no longer makes sense as the prices keep dropping in the area. We are considering a short sale or just walking away from the rental property. Does either scenario put our primary residence at risk?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      You mentioned California, and I will assume the property in question is situation in California. The key fact missing from a helpful analysis of your question is whether the loan or loans on the property in question is/are purchase money loan(s). In other words, did you refinance the property you are considering for a strategic default? If "no," then you are covered by California's anti-deficiency law if you allow a foreclosure. If "yes," then you are not covered for a foreclosure, but are if you short sale. Consult with a California lawyer for a more in-depth analysis, and a discussion of your options. See also Bills.com resource California Collection Laws to learn more.
      0 Votes

    • 35x35
      Feb, 2012
      Alex
      Thank you for very much for your answer. The original home was purchased in 2005 with an 80/20 first and a second mortgage and never refinanced.
      0 Votes

  • 35x35
    Dec, 2011
    Lynn
    In 12/2006, we purchased a $360,000 home. We took out a mortgage, but the sellers had multiple offers and were looking for a buyer who could put a substantial down payment down, which we did not have. Officially, my parents, gifted us the down payment. In reality, my parents took out a loan (unrelated to me or the purchased home on paper) and we agreed to make the payments to them. Our mortgage is current and we have continued to pay my parent's loan monthly as well. My husband and I are divorcing. My daughters and I have already moved out of the house and are staying in a family home at little cost until the marital home is sold and I can afford to pay. Our home has been listed for sale for 65 days and we recently dropped the price, but have had no bites. We are not underwater in that the mortgage is $309,000 but off paper, we are carrying the $30k second mortgage, so if we short sale or allow a strategic default/foreclosure, we will still have to pay the $30k mortgage for years to come with nothing to show for it. I initially listed the house and $359,500 as we have put money into the home. I dropped it to $335,900 which will put us in the neabtive upon sale considering the 2nd unoffical loan and transaction costs. On Zillow, I believe it is assessed at $320,00. It is a beautiful unique hoem, in good shape and in a great neighborhood outside Boston. We are spending $3,000 a month betwen the two loans in addition to utilities, which are avbiut to get pretty huigh through another New England winter, so it seems it may make sense for financial and emotional reasons to stop the bleeding. We both have good credit and need to understand our best options. Thank you very much. I can't leave it on the market indefinitely because emotionally we all need to be able to move on from this and also becasue I need to begin paying the expenses where I am staying.
    0 Votes

    • 35x35
      Dec, 2011
      Bill
      You can:
      1. Continue to drop the price, until you find a buyer.
      2. Try to rent the place and see if you can sell it a higher price in the spring, summer, or when property prices rise.
      3. Refinance to lower your costs, taking advantage of today's low rates.

      Any of these options leave you with a balance owing to your parents. That topic is best addressed in your divorce settlement, where the way that each of you will be responsible for the debt can be specified.

      You asked your question on our strategic default page. Strategic default does not seem to make sense for you, as you have equity in your property and I doubt that you just want to walk away from the debt you owe your parents.

      0 Votes

  • 35x35
    Oct, 2011
    Melissa
    Hello Bill, I am in desperate need of advice. My husband and I have been in our home for about 5 years. We bought our house in a seller's market, paying $132k when it was appraised at $118k. Houses in our area were recently reappraised and ours is now around $105k. On top of this, we are having issues with our air conditioner and the aluminum wiring in our house (none of which had been concerning to our home inspector). I also gave birth to our first child last year. While we are still doing everything we can (including borrowing from my parents) to make our mortgage payments within the grace period, we are just drowning in debt. We can't afford to make the necessary repairs to our home to even make it safe. We regret purchasing this house and just want to get out, even if it means going back to renting. What is the best course of action you can recommend at this stage?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      I have three thoughts:
      1. Reread the original answer above to learn the positives and negatives of a strategic default.
      2. Read the Bills.com resource Deed In Lieu Of Foreclosure vs. Short Sale to learn about these two options.
      3. Read the Bills.com resource FHA Short Refinance Program Helps Upside-Down Homeowners to learn if a short refinance will cut your monthly payments.

      Consult with a lawyer in your state who has real property or contract law experience before signing any deed-in-lieu or short sale documents. If you decide to allow a foreclosure, be sure to know how your state handles deficiency balances and if you are protected by anti-deficiency laws.

      0 Votes

  • 35x35
    Oct, 2011
    Tameka
    Thank you for the response. Currently, the mortgage on the primary home is ~$204k but zillow.com has it valued at $143k. The balance on the rental is ~$104k and zillow.com has it valued at $53k. We have about $50k in student loans, ~$31k in credit card bills, ~$1800 in taxes and ~$700 in medical bills. My income is our only income right now, which is about $64k annually.
    0 Votes

  • 35x35
    Oct, 2011
    Tameka
    Hi, Thank you for providing great advice. We currently own two homes, my primary residence and a rental property (both properties are in my name). We also have credit card debt and medical bills. Due to the economy, my husband's job loss and my renter's job loss, both mortgages are currently behind and both are underwater. It's easier to bring the rental mortgage current than the primary home mortgage. We are considering filing bankruptcy. We want to keep the rental and give the primary home back to the bank. Can we keep the rental and allow the bank to take the primary if we file bankruptcy after bringing the rental current? Will the mortgage on the rental be subject to cramdown or renegotiation? Thank you in advance for your assistance.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      It is difficult to predict the behavior of the bankruptcy trustee without knowing more about your financial situation, the balance due on the loans for each property in comparison to their fair market values, the prospects for the rental to be viable financially, and so on. The downside to a chapter 7 is that once you file, you lose control. A person filing can propose a plan, but if the trustee thinks the plan is cockamamie, he or she can throw it out and create his or her own.

      My advice? Consult with a bankruptcy lawyer in your state and present him or her your financials an your plan. An experienced BK lawyer will give you an educated guess what the trustees in your local bankruptcy court will think of your ideas.
      0 Votes

  • 35x35
    Oct, 2011
    Lori
    Hi. Love your site. My husband and I have a fabulous, large home that we can no longer afford, because his home building business failed. The business was personally guaranteed by us, so of course is attached to our home. We've had our home on the market for over 9 mos. and in that time only 2 people came through and (1) offer that wasn't even worth looking at. It was $80,000 less than our asking price! Our home is/was valued at $780 and we've listed it at $589 so we're not under water, but we can no longer pay our mortgage or the business loan. Attorney is pushing for bankruptcy and foreclosure, but we are reluctant. Our credit scores are 839 and we owe less than $1,800 in credit card debt and we have decent income as we both have full time jobs now, but our income will NEVER be what it was. We've "hung on" for almost 3 years not missing a payment and hoping to ride this economy out, but it's obvious this won't be ending any time soon. Financial institutions won't/can't work with us because we earn to much to qualify for assistance and not enough to even re-finance. We've just missed our 1st payment(s) and nobody has even called. . .the home mortgage nor the business loan people. Any thoughts would be very welcomed. Thank you for your time.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      There are no magic solutions to your problem. In fact, there is a cottage industry of con artists preying on homeowners in your position.

      I do not have good news for you. You paint yourself into a corner by not selling your property, which has just about dragged you underwater. Likewise, refusing to file for bankruptcy, which also would cut the line to the loans that drag you under, may harm you if you do not act.

      It was not your fault that the entire construction industry halted. Your business was not the only one to fail, nor will you be the first to sell your home for less than it once was worth, or the first to file for bankruptcy. Your challenge is to look at your financial situation dispassionately, hold your nose, and take the actions you know you need to take.
      1 Votes

    • 35x35
      Oct, 2011
      William
      Lori ...all can sympathize or empathize with you and your situation. I'd like to give you a few rays of sunshine on a bad situation.... when you are making great income , and home values are at least holding steady, all seems well... but it was a disaster waiting to happen, and the victim was ALWAYS You! What you need to realize first , to claw your way out of this, would be that the only reason it 'seemed' to work was because everyone else was letting you pay the bills for THEIR investment... they got all your cash in down payments, and monthly interest in cash (...principle too) , and you paid the RE taxes, upkeep, monthly bills, AND TOOK 100% of the risk of any falling prices..... if you are presently NOT upside down.... then there is still time to do something to save lots more of your 'value' than you might think!! ALL is NOT Lost! ...you are probably 'trapped in your 7% mortgage with the huge payments ( and , of course, can't get refinanced at a lower rate because you A) ...don't make enough income (DUH!!!) B.) Your home will not 'appraise" high enough for an entire refi... (??? hint; they want even more of your cash) and C. Your FICO is not high enough (...who's is!?) They are telling YOU that you are trapped in your monster home with monster pyments till they are good and ready to foreclose when you run out of rope! BUT.... The reason a buyer can NOT buy your home right now is because they want to force another sucker into the same situation and take his money in downpayment, fees, closing costs, etc, and more cash for any real estate brokers etc ( and a high 'contract price" will also cost them high RE taxes...every year. NOW, there is a way to get everyone free from this death spiral.... Using owner finance techniques and strategies YOU can get someone to purchase your home at SUBSTANTIALLY more profit for YOU... and simultaneously they will PAY subsytantially LESS each month for their home, cut their real estate taxes every year, greatly increase the tax deductable portion of all expenses...and cut down drastically on the downpayment needed to get the lowest mortgage rates possible.... and YOU can Help Yourself to much more profits from your sale while you get them into their dream home (...YOURS!!!) for super low payments and much less 'down' !!! Of COURSE, they will love that deal better than what they can find "ON THE MARKET" through RE Brokers... Understanding these new strategies is not as tough, nor are they so complicated, as you might imagine... and when you actually make more money on your sale and no longer have the incredible monthly payments, nor all the other added expenses and upkeep, you will feel GREAT! again.... so , please, get out from under the thumb of realtors, appraisers, government taxes, and huge mortgage debt... before it gets any worse, and before you lose what equity you have left. Florida is nice, you know....all year long
      0 Votes

    • 35x35
      Nov, 2011
      Lori
      Thank you Bills.com. You are right, we do know the actions we need to take. But I really appreciate you taking the time to respond! Guess I needed to hear it from an unbiased source. We'll be fine, husband and I will just have to start over together. Only this time we'll have more income because our children are already grown! Thanks again. Blessings to you.
      0 Votes

  • 35x35
    Jul, 2011
    Jacob
    I have recently been offered a job in another state and plan on accepting it. Unfortunately, I purchased a home last year in Los Angeles using an FHA loan, putting down 3.5%. The purchase price was 560k and the remaining principle balance is 547k. After speaking to a few realtors, we would hope to get anywhere from 540k to 560k for the house and with brokerage fees, we are looking at a break even of approximately 580k. Diluting my savings last year with down payment, house upgrades, furnishing and other expenses leaves me in a position in which I do not have the cash to cover the gap if we were able to sell the home. My loan is currently with Bank of America, and I am considering Short Sale or possibly taking a loan out to cover the difference between sale price and break even point of the home. My current credit score is around 830 and I have read some articles that inform me that I would loose about 150 points if I short sale but stay current on my payments. Ultimately, I would like to purchase another home in the next 18 months once I am settled in the new state. Any guidance on whether I should short sale, take a loan to cover the gap or any other options I might be missing?
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      The mortgage servicers are not doing borrowers any favors in short sales. You can assume the servicer's negotiator will demand you make a financial disclosure as a condition of accepting your short sale. If you are a high net-worth or income person and can afford to pay the deficiency balance, the negotiator will do what he or she can to extract it from you. If, to take the opposite extreme, you are a penniless pensioner, the negotiator will try to drive a hard bargain, but will realize he or she cannot extract blood from a stone.

      If your goal is to qualify for a new mortgage in a relatively short period of time, you have one choice — borrow to pay off the deficiency.
      0 Votes