Approximately 13 million American mortgage holders have negative equity in their home. What this means is they are in a worse spot than even a renter. If they had to sell, they would actually need to bring cash to the table. Or, they can do what many are doing and simply let the home go into foreclosure. And how many of the other homeowners are near negative equity? After all, you need over 5 percent in equity just to break even after all sale costs are factored in. (Source.)
Paul Simon wrote this:
She said it grieves me so to see you in such pain
I wish there was something I could do to make you smile again
I said I appreciate that and would you please explain
About the fifty ways
You just slip out the back, Jack
Make a new plan, Stan
You don’t need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don’t need to discuss much
Just drop off the key, Lee
and get yourself free
From Michael Becker, a mortgage consultant in Maryland. Michael writes … (Source)
I wanted to let you know that I deeply appreciate your post on strategic defaults. I get people calling me all of the time looking to refinance and when I find out how underwater they are I tell them it might be wise to walk away from the property.
I also tell them the consequences of walking away. Like the article said, a foreclosure will stay on your credit report for 10 years. However, if you walk away it will only be 3 years before you can buy a home again. (It used to be 2 years but Fannie, Freddie, and the FHA made it longer to discourage people from walking away.)
I tell them if they choose to walk away they need to make sure they have a decent car, and at least one credit card. The reason for the car is that it may be hard to get a decent rate on a car loan for a while if they have a recent foreclosure, and the credit card is needed to help you re-establish your credit after the foreclosure. One of the biggest mistakes people make after a bankruptcy or foreclosure is not re-establishing their credit.
I do believe that in the future the guidelines will be changed to allow people who have re-established their credit to purchase a home 2 years after a foreclosure. This because there will be thousands such potential borrowers and it would be stupid to prevent them from re-entering the market.
The other night I meet some friends for dinner. When a got there a lady I used to work with came up to me and told me her situation. In 2007 she bought a condo in Arlington, Va. for $300,000 and its value had dropped to $200,000. She still owed $295,000 on it. She told me she could afford the payment, but was considering walking away. I asked her what was her mortgage payment and condo fees were. It came to $2,300/month. Then I asked how much would it cost to rent a similar apartment. Her answer was $1,200-1,300.
I said the answer was easy, walk away. In fact, I told her I would stop paying the mortgage and see how long it took them to foreclose. She might be able to live there 6 months or more rent free.
Her fiancé was there and he didn’t agree with my answer. He said that her credit would be ruined for ten years and that the value would come back. I responded that a foreclosure would stay on a credit report for 10 years, but if you work hard at re-establishing your credit, the score can come back in a year or two.
I have seen people plenty of people with credit scores over 700 within one year of a bankruptcy or foreclosure. As far as the value coming back, I told him that it would take 10 years or more before that value comes back.
More people need to know that foreclosure is not the end of the world and that their credit can come back in a couple of years or sooner, especially if they take the right steps prior to the foreclosure.
Thanks for the post, and keep up the good work.
NOTE: Consult a lawyer to understand how the law applies in your State and in your loan situation. Walking away is NOT advised in many cases–you can walk away from your house and yet still be liable for the loan balance, taxes and upkeep.
- More see walking on mortgage as a viable plan (msnbc.msn.com)
- 10.8 Million US Properties Had Negative Equity In Q3 (businessinsider.com)
- CoreLogic: 10.8 Million U.S. Properties with Negative Equity in Q3 (calculatedriskblog.com)