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Financial Complication with our Dream Home

We built the house of our dreams, but ran into a problem that will cause as much $100,000 to fix. What can we do?

My husband and I were responsible borrowers. We built the house of our dreams. It was on the high end of our budget but we could afford it. The dream fell apart when cracks started to appear in the ceiling, walls, and foundation. In short we found out that it was built on hydro-collapsible soil. (When the soil gets wet it collapses.) The minimum to fix is $50,000 but it could be as high as $100,000. Our contractor can't afford to fix the house even though the soil issue was discovered during the warranty period. He "said" he would file a claim with his insurance company, but he is dragging out the process. We hired a lawyer to help us through the process and make sure our rights were protected. We have plenty of evidence that our contractor, the city, and the developer knew there was a soil problem but built anyway. (3 out of the 6 phases have this problem.) We cannot rally homeowners to file a class action lawsuit (it is a small town with a corrupt government). The other kicker is that the insurance company has a clause in the policy that may not cover the cost to fix the problem. With the market being what it is, there in a zero chance of a home equity loan for us to cover the cost of the repairs. (Not sure we should.) So we are forced into expensive litigation to a contractor that can't afford to pay and an insurance company that wont pay. So here is the million dollar question. We are new facing the fact that our home is a lost cause. So what is the impact if we walk away? Are there ways to minimize the damage to our credit? This is not our fault. There will be no government bail out for us. Or do we continue to throw money into it and hope? If we surrender to home, how do we get in contact with the lender. Is it possible to send a letter?

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Bill's Answer
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I think the best thing for you to do in this situation is to consult with your attorney to help you determine the best way to proceed, especially since you have already retained one to represent you in this case. Since the contractor, the developer, and other parties involved knew about and failed to inform you of the propensity of the soil to collapse, you may have a cause of action against them for damages caused to you and your property.

If your contractor is dragging his feet about filing a claim with his insurance company for the damages, you may also wish to include the contractor’s insurance company as a defendant in any lawsuit you file. If you can prove in court that the contractor and developer knew about the soil problems, or if they failed to complete any required soil quality tests, you may be able to obtain a judgment against the culpable parties. I am not your attorney, so I do not presume to provide you with legal advice in this matter. I strongly encourage you to consult with your attorney about the best course of action to protect your interests.

I do not think that you need to allow you home to go into foreclosure; rather, you may wish to work with your attorney to pursue legal action against the parties responsible for the problems with your home, hopefully allowing you to use the money awarded to make the necessary repairs to your property. However, in answer to your question, if you decide to "walk away" from your home, meaning you allow the property to go into foreclosure, you may experience several serious consequences. When a home is foreclosed upon, the mortgage lender usually auctions the property at a foreclosure sale, applying whatever amount is received at the sale to the balance owed on the mortgage. In many cases, the sale price at auction is not sufficient to cover the mortgage and other secured liens on the property, such as home equity loans; the difference between what you owe on the property and what the lenders actually receive is called a deficiency balance. In many states, deficiency balances can be collected like any other unsecured debt. Whether or not a deficiency is created on any of your loans will depend on the total amount of your loans compared to the value of the home; if your home is worth more than the total amount of your loans, your loans may not be covered by the auction sale price. If you would like to read more about the foreclosure process, I encourage you to visit the Bills.com Foreclosure Information page.

As for your credit rating, a foreclosure will be considered a serious black mark on your credit history. I understand that the problems with your home are not your fault, but your loan will still have been foreclosed, likely causing significant damage to your credit score. You can place a consumer statement on your credit report explaining the circumstances which led to the foreclosure; however, these statements are rarely considered by lenders when making credit decisions, and they generally do little to improve consumers’ credit scores. If you are forced to allow your home to go into foreclosure, you can expect to see your credit score drop significantly.

However, if you make all other credit payments on time, reduce your overall debt load, and monitor your credit reports to make sure all information is accurate, you should be able to rebuild your credit rating within a few years. That said, credit scoring is much too complicated a calculation for me to say exactly how much a foreclosure would lower your credit score or to determine how long it would take you to recover from its negative impact. To learn more about credit, credit reports, and credit scoring, I encourage you to visit the Bills.com Credit Resources page.

Again, I strongly encourage you to speak with your attorney about the possibility of filing suit against the parties involved in the building of your home. While litigation can be expensive, it may be worth the investment, as it could result in your being able to repair you home and prevent foreclosure. I wish you the best of luck in resolving these problems and hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com/

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