"Strategic" Foreclosure effects on credit??

[Anonymous]

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

[Anonymous]

Hi Yota! Welcome to the myFICO forums!

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Yota wrote:

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

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Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

[MattH]

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@Anonymous wrote:

Hi Yota! Welcome to the myFICO forums!

---

@Anonymous wrote:

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

---

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

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Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State.  In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends.  For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have.  I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying.  There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

[Anonymous]

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@Anonymous wrote:

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

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Are you unable to make your payments?

IMO, to "turn over the keys" merely because current market values are lower than the balance owed is not an appropriate reason to consider allowing to go to foreclosure.

Even if values take 5 or more years to recover, you still have something at the end of that time.  And you have to live somewhere anyway.  So unless you plan to substantially downgrade and rent, what is the point of letting it go?

Now, if you are being transferred in work, cannot afford to pay two payments (new location and current location) and you can't sell for what you owe, then you may want to talk short sale with the bank once they understand the predicament.

The damage to your credit, the cost of living elsewhere (you won't be able to buy, you'll have to rent for at least 2 years at which time you might not get as good of rates or prices), I don't see how you come out on top.

IMO:  Refinance for the absolute best rate you can get (possible to get in the 4's now) and wait it out. You will eventually recover.  You don't take a loss (just like stocks) until you actually sell.

Look at the stock market.  Those who sold 2 years ago lost their butts.  Those who bought made huge profits last year.  The same will be the result of real estate.  Any investment has it possible short term highs and lows.  You have to look at the term of the note and ownership.  In 10 or 20 years what will it be worth?

Well, just IMO.

[Anonymous]

Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into teh sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

[Anonymous]

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@MattH wrote:

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@Anonymous wrote:

Hi Yota! Welcome to the myFICO forums!

---

@Anonymous wrote:

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

---

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

---

Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State.  In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends.  For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have.  I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying.  There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

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Yeah - we did think of that. My understanding (and we would seek out a lawyer if we went this route) is that the house stands as the sole piece of collateral for the note to the bank.

This all may be moot...I honestly can not imagine going through with it, but its always an option nibbling at the back of my brain. My pride says "don't do it!" My spreadsheet says "hey, but the time your credit is on  the rebound you'll have saved $XXXXXX.XX and been able to move back home.I just figured I'd float the idea here and see what others had to say on the topic.

[MattH]

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@Anonymous wrote:

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@MattH wrote:

---

@Anonymous wrote:

Hi Yota! Welcome to the myFICO forums!

---

@Anonymous wrote:

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not  take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

---

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

---

Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State.  In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends.  For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have.  I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying.  There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

---

Yeah - we did think of that. My understanding (and we would seek out a lawyer if we went this route) is that the house stands as the sole piece of collateral for the note to the bank.

This all may be moot...I honestly can not imagine going through with it, but its always an option nibbling at the back of my brain. My pride says "don't do it!" My spreadsheet says "hey, but the time your credit is on  the rebound you'll have saved $XXXXXX.XX and been able to move back home.I just figured I'd float the idea here and see what others had to say on the topic.

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My gut feeling is, in your situation I would probably keep making the payments, and also find ways to cut other expenses and make additional principal payments to bring the principal below the current value of the house, but I cannot say for sure what I would do because I am not in your shoes (my wife and I bought our condo in 2002 and after a roller-coaster up-and-down market similar units right now are selling for about what ours would cost had it just kept pace with inflation over that time period).

[Anonymous]

I just made an appointment to meet with our real estate broker this weekend to discuss options...It will be interesting to see what the spring brings vs. what the prognosticators are calling for.

Its taken 3 long years to get from the low 600's up to the high 700's....I'd hate to blow that now.

[Lel]

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Yota wrote:

Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into teh sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

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I believe you can refinance through the Making Home Affordable program with LTVs up to 125%.  It used to be 105%, but the website indicates that the government has increased the ratio.

The MHA modification program is not doing well.  But little is said about the refinance program.  It's been a while since I reviewed the rules, but I believe that for a Home Affordable Refinance you can go to any participating lender.  That is, you don't have to stay with your current lender. 

[Anonymous]

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@Lel wrote:

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@Anonymous wrote:

Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into the sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

---

I believe you can refinance through the Making Home Affordable program with LTVs up to 125%.  It used to be 105%, but the website indicates that the government has increased the ratio.

The MHA modification program is not doing well.  But little is said about the refinance program.  It's been a while since I reviewed the rules, but I believe that for a Home Affordable Refinance you can go to any participating lender.  That is, you don't have to stay with your current lender. 

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Would this be true is the borrower isn't in financial straights? We can - and will continue to - make our payments, but its like shoveling it into a furnace (which yes, we do need to replace!). Hopefully our broker (he does mortgages too) will be able to fill in the blanks a bit.

Thanks.