100K underwater; how will credit be affected by short sale

[Anonymous]

Hi, I am a bit worried in posting this question; just asking for a "friendlly and supportive answer,"  Thanks!

Purchased my 1 bedroom condo in 2006 for 163K. At that time, it was appraised at 176K. 7% fixed Freddie Mac mortgage. Pay PMI because only put a few percent down. Mom is co-owner because my credit was not very good. Condos my size in my development now selling for about 45K. My outstanding loan balance is 147K, so I am more than 100K underwater--South Florida is one of the most depressed housing markets in the country right now.

I will be honest: I can afford to pay my mortgage, but I was hoping to refi but servicer will not do that since I am so underwater; also, denied my request for a modification 4 months ago  --I am re-applying because I lost about 3K in income this year permanently, plus no raise at work for last two years due to economy. I have shut off cable tv, buy used clothes and furniture, etc. I am not trying to cry "victim"-- just showing that I've attempted to reign in expenses. I think I was just naive when I bought (my first piece of property) and thought I'd easily be able to refi to a lower interest rate a few years after I bought.

I'm concerned that since the worth of my condo has shrunk almost 75%, that if I keep paying my mortgage, I will have to stay here the rest of life and never be able to sell without ending up penniless. I am 50 years old now and hope to retire at age 67. I am concerned about my long-term financial health.

Question: My servicer tells me that I can assume my mom's portion of the loan (50%)  for a fee of 1,000 dollars.  I want to do this because then my mom's credit won't get hit if I decide to short sale. I am up to date on my mortgage--no late payments. I bring home 3K a month in job and mortgage, taxes, PMI, and HMO = 1, 475 K per month.

Can someone help me look at the options? I talked to a real estate attorney who said , "if I were you, I'd walk away." I don't want to reneg on my loan...I just feel very trapped, and that I will be for a long time.

Should I assume my mom's part of the mortgage?

If she stays on the mortgage, to what extent will her credit be hit? Is the credit hit as bad with a short sale as with a foreclosure? How long does it last?

I'd really appreciate any advice on my options here.  Thank you!

[IOBA]

Many thoughts come to mind...

*  I don't know if you can "assume" your mom's mortgage responsibility for a fee of 1k.  I think you would have to refinance the mortgage into your name only.

*  Short selling or walking away may seem attractive, but then you have serious hurt your credit and your chances of buying another home in the near future.   It may affect your ability to rent a place in the near future.

Yes, it sucks that you are underwater on your mortgage.  It may not always be that way.   

A perspective from the other side...those of us left behind.

My neighborhood has a 10% foreclosure rate right now.  People are walking away from their properties.  Houses are selling for a fraction of what they were purchased at.  Those of us still here now have an additional financial burden (HOA) to pay for mandatory (state, county) upkeep the community.  Many of us in the community are financially struggling.  We are seeing 2nd and 3rd families move into one house.  We are seeing more and more rental properties in the community.  We are seeing and feeling much more run down because the empty houses are not being taken care of.   Because renters (around here) don't give a patootie about the property and neglecting the houses and the yards.   Having 10-16 people living in a 3 bdrm house takes it's toll on the house and the neighbors.  Property values continue to drop.

We, those that are left behind, are stuck with higher costs (HOA) and forced volunteer work.   When the neglected property next to me starts attracting rodents as residents I have to be on guard.   Then there is the jungle behind me that is threatening to take over my yard and my house!   Let's not forget about the people next door that have the Sheriff's Office banging on the door at 4am trying to serve them.   Or what about the abandon vehicles hogging parking?  And the 3 families crammed together across the street who rent and don't do a thing for their yard?  Or the 4 families living in the next house over?

The police come more often due to a rising crime rate.   Rodents and roaches have found free housing.   Dead trees.  Dead cars.  Jungles of ivy and other invasion plants climbing the walls, scooting across roofs...  Renters who don't care.  Overcrowded houses with fighting people inside.

It sucks.  Walking away may make you feel better right now, but please think about how it will affect your neighbors.   If you are in a condo, there are probably HOA or condo fees due each month.  One building included water/sewer in their condo fees.   Guess what?  People stopped paying for the fees/foreclosures happened.   One day, the residents who lived there had their water turned off.   There was no money to pay for water, building insurance, landscaping.  

Just, think about it please.  Do what works for you, in good conscience.  I know walking away looks really good right now...but who else do you affect by doing it? 

** A suggestion - have your mom buy one of those other units for 45k.   Sounds like a great price!   Then rent it out.   Use the rental income to offset the "ouch" of the economy.  Things bounce back.  May take a few years, but they do.  Good luck with your decision.

[stan_the_man]

A comment and a question.

Comment: If you can really, legally get your mom out from the mortgage. Do it. Odds are, if she'd do it again, you'd need her help to buy any property anytime soon if you did default -- plus it's not fair to her to take the hit as well if you can spare her.

Question: What is the going rate for rent in your area? What would you pay for rent if you walked away? In a lot of areas your rent might be higher than then what you're paying right now. If it is higher than your cost of ownership, then I'd stay put and treat it like a rental for now. Keep on trying to get a modification, and hope things improve in the real estate market.

Also, keep in mind, that you would owe taxes on any principal write down if you walk away.

[Anonymous]

Thanks for the info from those who replied to my post. Just to clarify, if I do decide to short sale, I will definitely continue to pay my maintenance fees at my condo. I would not think of leaving that to other owners. I know many have done that; in fact, we may have an assessment here to pay for those who have not.

Also, I did call the servicer of my loan, who said that I can assume my mother's portion of the mortgage, and the cost would be 997$, so that is a fact.

I'd appreciate any other comments. thanks for yours.

[Anonymous]

Thanks, I have checked out rents in my area. I can get a similar or larger apt than the condo I am in now for 400 dollars less per month, so rentling looks like a good option for me.

Again, thanks for your response!

[Anonymous]

One thing to address is the credit costs.  To me, saving 400 per month moving into a rental unit does not justify the cost of short selling.  The tax write off (unless that is counted into that equation) covers the 400 per month for the most part...  More importantly, there are alot of hidden costs when you take this big of a credit hit (and short selling will definitely be a large hit...  You may have any credit accounts you have closed (i.e credit cards) or have their interest rates hied to the maximum amount.  You may have trouble getting a car loan or any other financing in the next 5 years or so.  Depending on the state, they still may be able to come after you for the defualt amount.  It will likely be 3 or more years before you will be able to purchase another home.  Lastly, creidt score can even be an issue when looking for a job or obtaining stuff like insurance.  So, there are alot of little costs that make the $400 you think you are saving by moving to a rental that you have to account for. 

It all comes down to if you can afford to stay.  I fully understand people who have lost jobs or other issues and have to walw away or short sale.  But if it's not really a financial necessity, then it seems a bit silly.  Homes are not investments, they are places to live.  Yes it sucks for people that bought at the top and the market is now down, but eventually the market will recover.  If you were to walk and go back to renting, you would probably tae alot of credit hits, have difficulty getiing any more credit in the near future, loose the feeling of owning your own home, and then spend the next 5 years+ just paying rent to someone and loosing the tax writeoff you are getting.  It sounds like you are looking for the best long term decision for you.  I woudl say pursueing the SS is probably not the right one (of course that is for you to decide).  I would keep pushing for the loan modification to see if you can get the payment on it down a bit.

Either way good luck with it.

[JM-AM]

Just to add my 3 cents, which a lot of the time is only worth a penny. 

Few things to keep in mind;

1: Most condo owner's need approval from the board before you can rent them out. Then you need them to approve the possible tenant. This is not always the case, it depends on what is in your purchase agreement. Reason being, tenants do not have the responsibility as an owner has, even though the owner is responsible for his or her tenant. 

2. Staying somewhere because of the tax benefit is usually a bad idea. In your case saving $400+ monthly renting is a $4800+ savings yearly. Taking that $4800+ savings plus your standard tax deduction and invest in a retirement fund would be much more beneficial long term financially. Since your tax benefits of owning a home are based off a percentage of the interest paid for that year and decrease yearly, renting in your situation is the better alternative long term.

Good Example;

Interest paid: 11,521.87

 Deduction: 11,521.87 Standard Deduction (married): 11,400 Deduction: 11,521.87 Standard Deduction (single): 5,700

Tax Refund: 2,880.47 Standard Refund (married): 2,850 Tax Refund: 2,880.47 Standard Refund (single): 1,425

Net Cash: (-8,641.40) Standard Net Cash (married) 2,850 Net cash: (-8,641.40) Standard Net Cash (single) 1,425

Difference: (-11,491.40) Difference: (-10,066.40)

3. There are many different things to take into account in your situation. But no one knows your situation better then yourself.

IMO I would look at every possibility of what could be done, what needs to be done, and what is best financially for now and the future.

A: I would remove my mother if it is possible ASAP. No reason to have her take any downfall if that is what you decide. 

B: I would look at my past tax benefit on my last few returns and weigh what I gain to what I can lose if anything at all.

C: I would be realistic to understand that the market at some point in time will recover, but I wouldn't count on it being anytime in the near future.

D: I would take into account my employment, wages, and any other income I have.

E: I would take into account my age, for retirement purposes.

F: I would have to weigh in the fact that I am very upside down in my condo, and how long if ever (unlikely anytime soon) will I recover my losses.

G: Am I okay with not being a home owner.

H: Am I okay with walking away or short selling the house and having an effect on my credit history for several years to come.

I: Who else do I effect besides myself in this decision (wife,kids, relatives).

I am sure that you will think of every possible scenario, and I am also very confident that you will make the best decision for yourself and all that are involved.

Good Luck