My wife and I bought a townhouse/condo in 2006 for $229K and now it's work about 210K. My parents are struggling to pay their mortgage and would welcome my wife and I moving into their house, adding an in law apartment to the place and taking over their mortgage (not on paper yet, just making their payments via a side agreement). I'm just wondering that even though we can pay our current mortgage, should I try to sell the condo or just do a strategic default. My parents house is the house we plan to live in for the remainder of our lives, so looking to buy another house in the future isn't in our plans. What do you think?
Thank you for writing me.
I have listed below your primary risks if you decide to strategically default:
1. You will have a deficiency debt. A deficiency debt can give rise to a deficiency judgment or debt forgiveness. A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full. If the debt is forgiven it can viewed as a taxable event by the IRS and your state taxing authority. Forgiven debt is income. Please click this link to learn more.
2. Lower credit score.
3. Loss of the home or property to a foreclosure sale.
4. Recently, Fannie Mae implemented a rule that bans a person from obtaining a Fannie Mae mortgage, if that person strategically defaults. The ban last for seven years. Furthermore, the United States Government may pass a law that bans a person from obtaining a government insured loan, if that person strategically defaults. Please click this link to learn more.
5. Debt collections tactics, including mail, letters, personal visits to the property, phone calls to cell phone, work, and/or family members. Not all debt collection tactics are legal. You should become familiar with your state’s debt collection protection laws and the Fair Debt Collections Protections Act.
The question you should ask yourself is this: How much are we willing to come out of pocket to sell the property without facing any of the strategic default risks?
Is it worth paying $10,000 or $20,000 or $30,000 to eliminate any of the strategic default risks? Can you sell it on your own without paying a real estate broker fee thereby saving on your expenses?
Do you know what a short sale is? Have you explored that option? Will the bank be willing to lower your principle so you can sell the property at cost with no out of pocket, especially since the difference between the value and the mortgage balance is not that great? Will the bank be willing to agree to a principle reduction?
A short sale occurs when a lender enters into a written agreement to let you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000.
Do you know what a deed in lieu of foreclosure is? Have you explored that option?
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property. A full settlement of your total outstanding mortgage debt eliminates a deficiency and tax liabilities. A partial settlement still leaves open the possibility of a deficiency judgment or forgiveness of the remaining balance.
My advice is to first try to sell the property at either an affordable out of pocket cost or ask the lender for a principle reduction so you can sell at cost or utilize a short sale or offer to give the property back to the lender through a deed-in-lieu of foreclosure.
It’s a little early to strategically default and completely walk away from your property without exploring other options. Just make sure that if decided to work with a qualified professional that person knows what they are doing.
Please contact me with any further questions.