Should You Walk Away From Your Home?
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Despite the struggle, most responsible homeowners don’t think twice about whether they should make the mortgage payment each month. You’ve worked like crazy to stay on top of bills for years. You may have already fought your way back from bad credit and don’t want to let your credit score sink again. Whether you choose to fight and stay in your home for the long-haul, or you have given it your all and just can’t bear the crushing weight anymore, it’s important to know that there are better options than simply abandoning your home before you are late on the payments.
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As the stigma associated with losing a home has subsided considerably in the past year, more people are creating their own economic stimulus package. Why refinance (if you have equity) or pay the guy who wrote your original mortgage to take a shot at a loan modification, when you can just take the “Free Housing For Six Months Package” and simply stop mailing payments to the lender? Many people are exacting their revenge on the lenders who put them into the time-bomb loans, and some are not only getting even with the bank financially through withholding payments but are gutting and destroying the home on the way out.
Should we seek first to be ethical in this situation despite what others are doing, or should we do what is best in the near-term (and perhaps even the long-term) for our own families first? This presents a real dilemma for us, because we have always placed so much value on fulfilling our obligations, yet more and more people feel like their lenders betrayed them first. So, having done your best, what can you do to feel like you have done your best ethically to stay in the home, while also making a tough decision that could make your financial turn-around come sooner?
We Are Current, But The Payments Are Killing Us
First, the quickest call is to find out if you can refinance (which you probably already tried) which will be made tougher by the loss of income. There are many debt consolidation and loan modification companies springing up, and you might recognize the voice of the guy on the other end of the phone – it’s the guy who put you into your negatively amortizing pay option hybrid wacky funzone ARM! That’s right, the former loan officer who loved you enough to give you a three year prepayment penalty that you couldn’t afford to get out of two years ago when you had equity and could still qualify for a new loan, if it weren’t for that $15,000 charge to get out of the old loan! If you aren’t getting anywhere with your lender, it is definitely possible to find reputable loan modification companies, but first look for a personal recommendation and compare pricing with a few different companies.
We Just Went Late On the Mortgage – Should We Catch Up?
There is at least some consolation in the decision-making process here, in the sense that you (unfortunately) have already taken a hit to your credit score, yet this now allows you to make some firm choices without clinging to your FICO score for dear life. At this point, or even if you just have a maxed-out credit card or a late payment on your car, your credit is too low to get any traditional financing, so don’t waste time trying to refinance or get loans or credit lines. At this point, find a local real estate agent who knows your neighborhood (the man or woman whose sign you are sick of seeing everywhere is a good place to start). If you owe more than the property is worth, it is very important that you choose a real estate agent who has experience with short sales.
There is nothing to lose at this point in putting your home on the market, and you should call your lender to get information from the loan reconciliation department and start pulling together your financials – most recent paystubs, bank statements, two years worth of tax returns and the most important piece, a well-written hardship letter that explains what has changed in your situation. The decision to catch up on a late payment or two is personal and obviously based on a lot of unique variables, but one thing to keep in mind is that borrowing money from friends or family to stay current may just delay the inevitable and most likely could cause strain on the relationship down the road. If it feels like it is impossible to catch up without continuing to borrow, you could potentially be moving in the next six months or sooner, and it is a good idea to keep in mind moving costs, deposit and first month’s rent and start planning to get back on your feet.
What is the Government Really Doing to Help?
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On December 15th, a very extensive loan modification effort (which has been marked with some controversy) backed by the government goes into effect. If you are able to document the financial events that caused you to fall behind (essentially to prove that you didn’t stop paying the mortgage on purpose) and qualify for the modified loan payment, you have a strong shot at staying in your home. Find out if your lender is part of the Hope Now Alliance and most importantly, no matter how bad your situation is, do not ignore your lender’s phone calls or letters, and stay in touch with them, because the sooner you begin working with them, the better your chances of finding some resolution that will allow you to recover much sooner than walking away. Remember, you can get back on your feet again no matter how far down you fall.
Great article… this is not an easy decision to make for sure. I am glad I am not in that position. I would have issues with paying someone who, in hind sight, attempted to dupe or lure me into a mortgage I couldn’t not afford.
Though on the other side, I am a renter in in the past 6 months I had to move twice because the landlord lost the house. So, if you have renters, pay your damn bills!
I wonder how wrong it would be to walk away. We did the right thing in the 2001 Silicon Valley bust. My husband and I lost our jobs, went thru 9 months of emergency living expenses, sold the house for 70% of what we paid to avoid the shame of bankrupcy and to safeguard our only remaining asset, a small 401K retirement fund. The bank (WaMu) got every penny, RE agents got full commissions.
The economy there dropped off a cliff into a severe local depression, but no one offered us any help or guidance on how to handle a financial disaster: not our accountant, lawyer, bank, mortgage co., real estate agents, the IRS–no one. We were too ethical to walk away when crushed by an economic tsunami, but now I think were were just stupid and depressed.
Why didn’t WaMu have to share the loss in some way? They went on to make crazy, sub-prime loans (ours was conventional). We played by the rules and started over with just enough for 1st & last month’s rent at age 45. WaMu gamed the system and helped cause the current mortgage meltdown. Why should homeowners who are struggling now even try to be ethical? Your article tells them how to be ethical, but not why.
I’ve read several articles like this one, and they are all informative and helpful, but there’s a blind spot. What about homeowners who dealt with crushing payments for so long that they never had money to maintain a house that is now crumbling down around them? That’s where I am now. Not only is the mortgage hideously upside-down in what had been a hugely bubbled market, but it’ll take thousands of dollars to bring the place into a safe and livable condition, nevermind a salable condition.
What do you do then? I rented an apartment I could reasonably sure wouldn’t burn down around my family and don’t know what to do next.
This is an excellent article that portrays exactly what people are going all over the US. The same people that put us in those crazy mortgages are now coming to the rescue. One thing is for sure, 70% of people that got into this mortgages shouldn’t be in a mortgage, they do not have steady income to maintain even a modified loan. I was read that 50% of people have re-defaulted after 6 months of modification, that is just insane and shows where the problem is.
There is also the other aspect of forclosure not many are talking about, or at least not much that I have heard - those that bought what they can afford (financially responsible purchase), are fine with payments as they are (fixed loan), cash in the bank, zero debt if the mortgage is not counted, and have great credit. My income is not at risk from the current issues in the economy. We are looking at what appears to be an irrecoverable loss in value because we were responsible.
Convince me I should continue making my payments! For being responsible with money all my life I find myself in a good position to walk away with little or no negative effects to my financial well being. Really, why should we (the folks in similar situations to mine) get to suffer because the majority can’t perform simple math and understand terms of a loan? Um, no. Where’s my “help” to recover the 130k loss (I do admit paper loss at the moment)? I’ll take mine in the form of a “fine” from one of the CEOs with a ridiculous bonus history that led leading a company with a business model that could not practically sustain itself. Leadership by example is great, no?
I cannot see the value of my home exceeding my purchase price within the next 15 years, if it ever does. The neighborhood looks like no one really cares or has pride in the house they are living in even if they are renting. Staring at basically bad debt of the value of the loss is really unsettling
I am the last one in the “what can I get” line - usually one of the first in the “what can I do” line. But this case is different. The irresponsible choices of the many here are affecting my financial future. This is expected whilst playing the stock market, not investing in a home. I will be far better off financially if I take the value of my current payments, rent something for less and bank the difference. Cut my losses at what has already gone into the mortgage and house, take the hit to my perfect credit, and start from zero now, rather in 10 years when the 100k+ value possibly is recovered. It is a business decision, just like the business decision to sell loans to people that cannot afford them.
To bring “morally right” into this decision is to have your head in the sand. Where were the morals of the industry and buyers in the past 5-7 years? Why should I be placed in a position to be punished for my responsibility when those that are being irresponsible are continually being rewarded? Where was the will power to do the right thing while no one has been watching?
This is an adjustment period that all capitalistic environments must go through with its varying cycles. LET IT FAIL. Something better will evolve out of it rather than the same old crippled, patchworked thing limping along forever.
Regardless of the morality or blame, I wonder if people are considering the role of education to prevent future financial catastrophes?
We didn’t have much day-to-day, “real life” financial education in high school (10 years ago for me) beyond the occasional “oh wow compounding is powerful” and general economics. Have things changed? Are today’s kids learning what they need to about money in high school and college? Perhaps we went over it briefly in home economics, but I had no clue until real life hit me.
I’ve learned about mortgage terms, credit scores, and basic financial sense through life and mistakes. My credit score, income, and condo are all fine, I’m much in Fred’s position above (but more optimistic about when it’ll “turn around” and I do appreciate the property tax break in the meantime).
I also have family affected by their own foreclosure, so try as I might, it’s hard to be completely heartless about those that go through foreclosure.
Excellent point - let’s address the problem, not the symptom!
in response to the over 50% default rate on modified loans. most of those modified loans are not really modified loans. the lnders are not for giving any priciple and are rolling unmade pmts to the principle and in some cases are rasinf the pmts. they need to modify the loans so that they make since for the borrower, just like when they were originating the loans. Ha
in response to the over 50% default rate on modified loans. most of those modified loans are not really modified loans. the lnders are not forgiving any priciple and are rolling unmade pmts to the principle and in some cases are rasing the pmts. they need to modify the loans so that they make since for the borrower, just like when they were originating the loans. Ha
I would not worry about the credit issue, if you “walk away” and you find yourself affordable housing,you should be saving, rebuilding and paying cash. the government is the one that wants in debt and spending money we don’t have to keep the economy rolling.
Fred,
I don’t think I could have said it better myself. I have a stable income, good job, I have a FICO over 800, but I find myself with no real reason to stay in my home. On top of the irreversible loss I foresee in my home, the property taxes are ludicrous. When buying my house I could not get a straight answer at any point from the Bank. The taxes ended up being $2000($6000 total) a year more than the bank estimated and even though the values are dropping rapidly I have gotten no reprieve from riverside county. The assessor doesn’t seem to know how to do his job. I paid 372k for my home on a fixed 40 year mortgage. The bank tried to push my into an interest only to which I refused. Now similar homes around me are going up on the market listed at 145k (auction I think which means 170k sell price).
I can make the payments though it is a slight bit of a stretch, but I could be retiring 10 years earlier with a house at 175k. Why would I want to work an extra 10 years to pay off debt to a mortgage industry that caused this crisis. Not to mention why should I pay property taxes to a county that lies about the value of your home to keep taxes high? I really would like to find a reason or incentive to stay… I guess keeping my 800 FICO is a slight one, but I rarely use credit these days. I have 0 debt in cc’s and my auto loan is nearly paid off. I feel no moral obligation to pay a bank that had no problem giving me a no money down loan on something they had to know was grossly overinflated.
MAKE NO MISTAKE ABOUT IT! THIS WHOLE MESS WAS CREATED BY THE BANKS, WALLSTREET BUT MORE IMPORTANTLY THE GOVERNMENT FOR ALLOWING THIS. THIS HAS NOTHING TO DO WITH PEOPLE WHO TOOK LOANS THEY CANT PAY. WHO IN THIER RIGHT MIND WOULD STAY IN A LOAN THAT IS THREE TIMES THE VALUE OF THIER HOMES? CREDIT SCORES? WHO CARES I WILL SACRIFICE MY CREDIT SCORE 1000 TIMES OVER INSTEAD OF FLUSHING MONEY DOWN THE TOILET EVERY MONTH. MY ADVICE DEFAULT RENT SOMETHING CHEAP FOR A COUPLE OF YEARS SAVE YOUR MONEY AND IN A YEAR BUY THE HOUSE CASH! FINANCING HOME LOANS IS A THE BIGGEST SCAM IN HUMAN HISTORY BUT PEOPLE SEE IT AS NORMAL BECAUSE ITS THE NORM. WE ARE ENTERING INTO A NEW AGE OF THE REAL TRUTH WE WILL ALL BE BETTER OFF IN 5 YEARS IF YOU DEFAULT NOW. GOOD LUCK AND GOD BLESS.
My renters stopped paying months ago. I took them to court and the judge said they could stay until February 1, at which time they can appeal (or if they don’t they will be evicted). Meanwhile months have gone by and I am liable for $2900 a month on this house. I have gone through my savings. I will have no choice but to walk away.
Fred and Dan, you both share my sentiments: I’m a responsible borrower with good credit but am $250K underwater. Why continue to pay to recoup this loss, as well as an inflated payment along the way? Who needs a credit score if the banks aren’t lending? I say, “Walk!”
I purchased my first rental property at the age of 21. Everyone said I would make a killing and was really smart for investing so young. I wish I had done more research and seen that we were approaching an inevitable bubble. I bought my first property (a 2-family) for $190k in 2003. Within a year it was valued at double that.
After refinancing and putting money into the first property, I bought two more properties the following two years. I had 12 tenants total (being a landlord is no easy task!). The mortgage lenders were pushing ARM’s like crazy… and they made sense to an investor like me. I needed the lowest monthly payment so I could take the little income left from the rent to put back into the properties. Plus, I could always just refinance my 2-year fixed / 28 year adjustable mortgage before the 2 years-fixed were up (refinance to a conventional 30-year fixed)… right?
Well, taxes went way up. I had a few tenants that cost me over $15k in lost rent (damn tenant-rights laws!), unexpected property damage from frozen water pipes, a couple more bad tenants, and while all this was happening the value of my house secretly dropped below the amount I owed… oh sh*t.
Then I get a letter in the mail saying my monthly mortgage payments are going to increase by more than $600 a month… but wait, I’m already dishing out over $200 a month from my pocket to pay for the properties (assuming all the units are fully rented)! I can’t refinance because the value of the property is less than what I owe. I can bust my ass for the next 5-10 years trying to keep up with the payments or I can let everything fall down, file for bankruptcy, and move on.
I’m filing. And I’m damn glad. $450k multi-family properties are now for sale at $140k… less than I bought my first property in 2003. For me it’s easy because they were investment properties, not houses my family lived in (I’m single). I’m renting now and saving as much money as I can, because when things start to turn around I want to be ready, not buried under a million dollars in debt.
Amazing. Simply amazing. The types of speculators like “Raam” and other should be tied to a tree and left to rot. It’s these fine people who are going to walk away and leave the societal, writ large, on the hook for their problems. Good job Raam–way to take responsibility.
I can appreciate both Raam’s concerns over his financial future as well as Bob Green’s sentiment that such investors are ducking their responsibilities. Personally I wonder what happens to the renters in these scenarios? With a foreclosure, do the renters get kicked out?
For homeowners and especially investors, the ARM reset rates SHOULDN’T be a surprise. Granted, the advice I got was “don’t worry, just refinance before the rate resets.” And I understand life’s events can ruin the best laid out plans (unemployment, medical crises, etc).
But it’s all there in the paperwork - the rate, the % offset and which Treasury note or bill it’s tied to, the maximum in can increase to, the maximum percentage it can jump in any given year. (It makes great bed-time reading)
I think I’m ready for my own reset. I do plan to refinance before it happens, if possible.
It’s important and best to make informed decisions, but in the case where we don’t/didn’t realize what we’re signing, it’s best to understand it sooner than later!
We all pay for it when we’re ignorant of what a great “deal” we sign up for.
Bob Green is just mad because the bank owns him! Probably have been paying through the nose for years and cant afford to walk away from his house! The truth is by the end of 2009 all real estate will be worth 80% less than 2005 prices. Deal with it! real estate will never reach 2005 prices again….maybe in 30 years! by then how much money have you flushed down the drain BOB? EVERYONE SHOULD DEFAULT OUT OF THE OLD MARKET AND BUY AGAIN IN 7 YEARS AFTER YOUR CREDIT IS FIXED AND I GAURANTEE YOU WILL BE BETTER OFF IN THE END. WE ARE IN A NEW AGE OF PEOPLE REALIZING WE HAVE BEEN SLAVES TO BANKS AND IT DOESNT MATTER IF YOU PAY YOUR MORTGAGE ON TIME FOR 29 YEARS BUT GOD FORBID YOU LOSE YOUR JOB OR GET SICK THE BANK YOU REPO YOUR HOME IN YEAR 29 OF A 30 YEAR MORTGAGE. IF YOU THINK THE FORCLOSURES WERE BAD IN 07-08 YOU JUST WAIT TO 09-10! IN 09 A TON OF ARMS ARE SET TO ADJUST TO REDICULAS RATES AND THE BANKS DONT CARE THEY WILL TAKE YOUR HOME ANYWAY. WALK AND MOVE ON WITH YOUR LIFE AND USE THIS TO TEACH YOU TO NEVER ALLOW THESE SUB HUMAN GREEDY BANKS TO INSLAVE YOU FOR LIFE TO PAY THIER CEOS THIER 20 MILLION DOLLAR PAYCHECKS. WAKE UP PEOPLE THIS IS ALL A BLESSING IN DISGUISE. GOOD LUCK AND GOD BLESS