Foreclosure

[Anonymous]

Hello,

My wife purchased our house 5 years ago at 185,000 with a interest only deal. so for the first five years not a dime went to principal. The value of the house is now 50,000 and falling each and every day. Now we have good credit score high 700's no and are current on all payments. We are in the process of adjusting the loan which will now be 194,000 with a lower interest rate. I am of the opinion that we stop making all payments and dump this money pit. I don't see any way of getting any equity on this deal.

It will be 24 years  before we have a penny of equity provided the value of the house stays the same. Forecasts say it will drop through 2015. Is there any advice anyone could provide. I want to get a new car loan before I stop making payments and maybe even buy a second house and bail on the first one. HELP! Frustated in Arizona

[Anonymous]

What you are referring to is known as strategic default. It is a widespread phenomenon in areas where the housing market has been hard hit. The first thing to understand is that the process will put a hard hit on the credit scores of whomever is on the loan. You said your wife bought the house. Is the mortgage in her name only or are you both on the loan?

If you have the combined income to make a new car purchase and finance another mortgage with the current mortgage then it would be in your best interest to do so before defaulting on this one. All others please note - I am not making a moral judgment on the idea of a strategic default. The OP is simply seeking financial answers to the question asked.

As to the effect on the credit scores you can try the simulator and it will give you an idea but my guess from good credit would be +100 points initially and a lessening impact as the 7 year reporting period elapses. Hope this helps.

[jamie123]

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@Anonymous wrote:

What you are referring to is known as strategic default. It is a widespread phenomenon in areas where the housing market has been hard hit. The first thing to understand is that the process will put a hard hit on the credit scores of whomever is on the loan. You said your wife bought the house. Is the mortgage in her name only or are you both on the loan?

If you have the combined income to make a new car purchase and finance another mortgage with the current mortgage then it would be in your best interest to do so before defaulting on this one. All others please note - I am not making a moral judgment on the idea of a strategic default. The OP is simply seeking financial answers to the question asked.

As to the effect on the credit scores you can try the simulator and it will give you an idea but my guess from good credit would be +100 points initially and a lessening impact as the 7 year reporting period elapses. Hope this helps.

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+1 Good advice!

[Anonymous]

Thanks for your reply. I was looking at the total cost for both loans and turns out there is only a 20,000 difference between them. What the crap kinda deal is that. I was not involved in this process until i was required to sign. This whole things seems like a scan. I was wrong about the 5 years it was 10 years interest only. And this program I believe HART is just not gonna cut the mustard. At the end she will be 35 years  paying on this house that I dont believe was ever worth the orginal loan amount. I could not find a assesment for the house in the orginal paperwork. I did find the county's tax assesment for the property and it was 85,000 not the 185,000 she orginally financed. Why would that be? Is our banking and home loan system such that they would allow a house that has a value of 85,000 be financed for 185,000? I am going to see an lawyer and ask some questions? Has anyone heard of such a thing?  The loan is in her name only. She has a concern that if we there is a forclosure on her credit she will never be able to get another home loan. And so I ask the question what is the result of a forclosure on a persons credit? Would she be able to get a loan in the future?

[Anonymous]

Yes, she will be able to get another loan in time.   In fact she can qualify for a First Time Home buyers loan after 3 years, if scores are above the required amount.  

Foreclosure hurts your score, but does not kill your chances of ever getting a mortgage again.  After 7-7.5 years it will be completely gone from her report, and will appear as if it never happened.

One thing to note on a Foreclosure is that the Bank can and most likely WILL come after her for the difference in loan from what they were able to get at auction.  So if they sell the house for $30-40k then they may sue her for the remaining $140k+ difference.

Another option might be to try for a Short Sale with NO Recourse.  If the bank accepts the lower offer then they let you out of the loan and Forgive the difference.  It could be a hit to her credit.  Maybe not as much as a Forclosure depending on how it is handled.  Some banks will not consider this option unless you are behind on your payments, which will hurt her credit.