<p>Some history: my nephew did what he thought was the right thing. Saved up for a down payment on a house. Put 20% down and a very little starter home in a good neighborhood. That was five years ago. He purchased the house for $130,000 and with the economy here, similar houses here are now going for $40,000 - $50,000. He is now underwater on the house and although he is capable of making the payment, it’s getting harder because his salary has been reduced from lack of overtime at work. The bank did agree to lower the interest rate (which was at 6.5%) but now he probably owed $100,000 on a house worth half of that. Not only that, but he had a buddy paying rent to help out who lost his job so that income will be lost.</p>
<p>He asked me what I thought about either walking away from it or trying to get a short sale. I’m pretty fiscally conservative and feel that as long as he’s making the payments, he doesn’t want to ruin his credit rating. But I’m having a hard time rationalizing this. What would you guys advise and why? </p>
<p>He says if he stopped making payments and set that money aside, he could have enough for a down payment on a similar house on the same street by the time the bank foreclosed or agreed to the short sale. How long would it take for another bank to lend him enough for a new house? If that’s too long, we’ve actually considered loaning it to him ourselves. He’s a pretty responsible young man. He bought the first house at age 25 and it’s such a shame to see the situation he’s in now.</p>
<p>Is he living in the house?
If he can make the payments & is living in it, why would he want to sell it just because current value has gone down?</p>
<p>The income required to buy a home should not be dependent on overtime. Always buy a home with that in mind.</p>
<p>I think he should stay put & not freak out when the market is moody.
;)</p>
<p>I agree with Emerald. Houses are a long term thing not a short term thing so who cares what the market is right now. If he can afford the mortgage payment he is probably better off in the long run not trying to short sale. There is no upside to a short sale if he can afford the mortgage payments (especially if he finds another roommate to split costs with.)</p>
<p>I totally agree with EK4. Presumably he likes the house since he bought it. If he can make the payments (even with having to tighten his belt a bit), he should stay put. It will be many, many years before he will be able to buy another home if he lets this one go into foreclosure. </p>
<p>What if he decides to marry? What would a future bride think about his inability to buy a home or a car or even get a credit card? A lot of people have gotten caught by the housing downturn but they’re not all walking away because they’re underwater. I wouldn’t consider that to be responsible behavior.</p>
<p>Stay. We bought a new home at the height of the housing market in the late 80’s and found ourselves upside down. When my H found a great opportunity and we had to move, we decided to rent the house out and pay the difference. We sold the house 8 years later and more than doubled our money. We did have to put our money into another rental property to void capital gains tax but it was worth waiting!</p>
<p>Where is the hosue? It is unlikely some areas (Lee County FL and Las Vegas are 2 prime examples) will ever recover to 2005 levels, which were extreme bubbles. While it doesn’t seem right ethically, many people are walking away from houses they can still afford to make payments on, as they can take that monthly payment, rent a similar property for 50% and bank the rest. </p>
<p>There is plenty written on the impact of either a short sale or foreclosure on your credit history. Do not feel sorry for the bank - they made an investment decision that went bad. That’s their business.</p>
<p>Heck, there are a number of people who are staying in their houses, not making any mortgage payments and using the money that would have gone to the mortgage payments for other purposes. It is taking some banks a long time to get around to foreclosing on people. Looks like it’s occurred to your nephew to continue living in the house without paying mortgage payments and banking all of the money.</p>
<p>It’s tough…at what point do you quit throwing good money after bad?</p>
<p>Find and consult with a good real estate attorney in your nephew’s area who daily does lots of short sales closings and distress transactions–get options from the lawyer. Ask some busy Realtors for attorney names if necessary. The lawyer can hook you up with a good Realtor too if needed.</p>
<p>The market and policies with lenders and regulators change day to day–a good lawyer should know how to handle most lenders and potential problems and can be a tremendous aid. If your nephew’s market has tanked as bad as you describe, he needs to know his options. If he loses his job or has to move to another area he needs to be ready for any scenario. I know in Florida the real estate market is brutal now–it’s every man for himself. And don’t trust the lenders or rely on anything they say–find a lawyer to avoid getting burned too bad. Good luck</p>
I think that’s his biggest question. We’re talking the market in Michigan. It may not recover in twenty or more years. Meanwhile, he’d be making payments of $100K on a house that will never be worth that, much less what he paid for it. He’s already lost his downpayment. How much more should he lose? Especially if he can buy another one for half that. His credit rating would only be affected for about 7 years and he’s still under 30. Seems a better prospect than paying on this house for another 25 years.</p>
<p>The more I think about it, the more sense it makes.</p>
<p>It’s called “strategic default” and it is epidemic here in Florida. In fact, it is now the major market mover. People who owe $300K on an identical house in the same neighborhood that now can be had for $125K are taking the leap. Most are going to the bank of Mom & Dad. The buyers get a similar house for less than 1/2 the price and Mom & Dad get 4% on their savings instead of nothing. Hard to criticize when corporations have been doing the same forever. But I know that no good can come of it.</p>
<p>A friend of ours did this with her property in Nevada. Marriage broke up, house was too much for her to pay for on her own, sold it in a short-sale, and moved a block away to an equivalent property that her parents helped her pay for. She’s paying them back instead of paying a bank.</p>
<p>Talk with a real estate lawyer, and with a realtor who has experience with distressed properties for ideas on how to handle it all.</p>
I don’t know a thing about the impact on the nephew’s credit, but the current housing market can hardly be characterized as “moody”! It’s cataclysmic, and you’d be hard pressed to find any real estate expert to predict that housing values will come back to pre-2009 levels in our lifetime. Assuming the credit impact is palatable, I think it’s crazy to continue investing in a worthless asset. Unfortunately, in our part of the world there are no non-recourse mortgages, and no one can walk away from the obligation, but will be forever personally liable for any shortfall after a foreclosure sale.</p>
<p>My nephew bought a home at the height of the market, in the Bay area, with a partner. They shared the house with the hope that they could sell the house down the road adn each part with enough to then afford a smaller house.</p>
<p>Partner got married and had kids, all in that same house. In the meantime prices went down and jobs changed. They ended up doing a short sale to get out of the house and move to a new area. He has to wait at least another year before he can buy at a good rate, getting that SS off his credit score, but is happy with the choice.</p>
<p>All of us old folks advised strongly against the partnership, but who listens to us!?</p>
<p>I live in Michigan. The market here is not “cataclysmic” - the market was never as overheated here as it was in CA, FL, or NV. I know that my own home probably lost about 20-25% of its value (from height to trough) but has recently begun to rebound, price-wise. It sounds like the nephew has had worse luck than we have , but I still don’t know if it’s to the panic point yet. Personally, I’d ride it out longer.</p>
<p>I’m not a fan of short sales and the hit it puts on your credit. Then again, I tend to be very conservative in this type of thing.</p>
<p>^^ Agreed. Many of these decisions weren’t just a “bad business decision” on the part of the bank, but also a very poor decision on the part of the buyer. I am speaking generally here, not specifically to the OP. So the bank will loan on 40% of income on an over-inflated appraisal? That doesn’t mean it’s a smart thing to do. Yes, the banks are at fault, but so are the buyers.</p>
<p>Numerically speaking, I understand the numbers and desire to walk away. Ethically and morally, I do not. Legally, it’s a contract. There should be recourse and repurcussions for breaking that contract. We’re all paying the price of the stupidity shown both by banks and consumers.</p>
<p>Let’s do the math here. If he paid $130,000 for the house and put 20% down then he already has $26,000 plus the payments he’s made over five years. So he’s basically down to owing $100,000 on a house worth half that. He can continue to make payments for the next 25 years and hopefully, it will have gone back up to that. Or he can do a short sale with permission of the bank, or have it foreclosed. Either way, he’s still out the $30,000 but he won’t be out the rest. He can then buy a new house for $50,000 and make payments for 15 years. He comes way, way out ahead.</p>
<p>And yes, there are banks that will lend him that within a year or two. Many, many people here have done that.</p>
<p>Not everyone who is underwater with their mortgage bought their home "on 40% of income on an overinflated appraisal ". Many people bought a modest house that they could conservatively afford on their income. Unfortunately, many industries have been hit hard by the downturn in the economy and employees in these industries have seen their incomes cut, some drastically. These people no longer have the income to pay their mortgages. Despite what most people think, the banks are not all that eager to help people in financial distress. Their only choice in these situations is to walk away.</p>
<p>Their only choice in these situations is to walk away.</p>
<p>However that isn’t the issue in this case.
The owner has had his interest rate reduced by the bank. Although he bought the house counting on his overtime salary which is no longer forthcoming, he is still able to make the payments. He wants to short sale this property and buy another house on the same street.
I think since he is fine with having a renter to share costs, he should return to that plan.</p>