‘The big step‘is a MarketWatch column that covers the pros and cons of real estate, from finding a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next step should be? Email Jacob Passy at [email protected].
Just before the pandemic, my husband took a job that required us to move out of the state. However, due to teleworking, we haven’t had to do this yet. My husband and I have two young children. Because of our teleworking, my in-laws have watched our children at home and they often stay with me for days.
My husband and I asked his parents to move in with us as soon as we moved. In theory, this is a great plan for everyone involved: free childcare for us, reduced costs for them, and we all enjoy each other’s company.
The dilemma is my in-laws have $ 50,000 underwater in 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 doesn’t think it’s right to go away. He thinks the best plan is to keep paying the mortgage even if you don’t live at home.
A short sale, even if a buyer were willing to take on the problems, would be devastating on the savings they have. My husband thinks the best option is to go away and take the foreclosure credit. They would live with us and the mortgage payment would no longer be an obstacle.
Also, my husband is the only child and the named executor of the estate. My husband realizes that every time his father dies (he’s 71) the house will be his problem. Should my father-in-law keep paying or go away? Are there any other options we should consider?
With best regards,
A worried daughter-in-law
Your letter is an important reminder that even at a time when home values are skyrocketing, many Americans continue to owe more on their mortgages than their homes are worth, also known as “underwater” for a home.
Millions of Americans found themselves in this position after the subprime mortgage crisis that created the Great Recession. But although real estate prices have risen – in many cases to new highs – around 1.6 million houses are still in negative equity according to the third quarter of 2020 the latest data available from CoreLogic
That is around 3% of all mortgaged houses nationwide.
Leaving a house underwater is an unwise move no matter which way you cut it. And virtually any financial professional would advise your family to avoid this at all costs.
To start with, foreclosures are utterly devastating to a homeowner’s credit score and will stay on a person’s credit record for seven years. You may be thinking what difference does it make? What if your new form of living doesn’t work? Your family and in-laws have only spent a short time together – this is very different from living together permanently.
If your in-laws decide they need their own space, 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 card to get out of jail. You wrote off the short sale opportunity because it would hurt your in-laws’ savings, but that is exactly what could happen in a foreclosure.
“Depending on the laws in your state, the lender could foreclose the loan, sell the property, and investigate the parent’s deficiency judgment – the difference between the sale price and what was owed on the loan, plus taxes, insurance, fines and fees,” said Rick Sharga, a mortgage industry veteran and executive vice president of real estate data company RealtyTrac.
Do not miss: I plan to retire soon. Should we sell our house while the prices are high – and rent it for two years?
Federal law provides that retirement assets on company-sponsored retirement accounts such as 401 (k) are exempt from attachment by creditors in the event of a deficiency judgment. Some states extend this courtesy to self-managed retirement accounts.
There are also moral and ethical considerations. Your parents-in-law signed an agreement with the mortgage lender, so it is understandable that your father-in-law would feel obliged to stop his end of the deal. Research also shows that foreclosures can lower the real estate values of homes nearby.
What should be done instead? Well, for starters, you should all investigate if your in-laws are eligible for any form of assistance in making the necessary repairs to their home to get it into a salable condition. If one of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other resources You can look for financial assistance including the National Association of Area Agencies on Aging and Habitat for humanity.
I also think that 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. Servicers can still look to your in-laws to get the balance on the loan after the sale – although that depends on the state – but like I said, that goes for foreclosures too.
“Another option could be a ‘deed instead of foreclosure’ where the house is turned over to the bank without going through the foreclosure process, possibly in exchange for the bank’s promise to waive a defect,” said Eric Dunn, director of Litigation at the National Housing Law Project.
A short sale or a replacement deed would affect your in-laws’ creditworthiness, but it would still be less severe than the hit they would take in a foreclosure. The servicer must agree to both options.
They could also always see if the lender would be willing to lend them some of the principal of the loan. It’s unlikely, but the lender may be willing to be flexible – foreclosures are expensive for mortgage lenders, after all.
Before your family makes any decisions, I strongly recommend discussing your case with a real estate attorney or HUD-certified housing advisor. These people could help negotiate the best possible solution with your in-laws’ lender to make sure they get better out of this situation. I wish your family the best of luck.
Continue reading: I am retired and I won’t live to see my mortgage get paid back. Should I refinance to lower my monthly payment?