My Condo Is Underwater , Thinking About Walking Away ?
ByHello everyone,
I currently own a condo in suburban San Diego that is severely ‘underwater’. The delta b/w the current balance on my loans and the current value of the condo (estimated by what neighboring condos have recently sold for) is = -$150K.
I’m a very good borrower, my 2 mortgages are current, have never missed a payment, have even made extra principal payments throughout the last 3 years. My financial situation is very good, I have a credit rating of ~800, and (as judged by my income) I can definitely afford to keep my condo.
But, I’m about to lose my job, layoffs are coming (I can’t go into it, I’m just fairly certain it’s going to happen in my company, enough said) . . . On top of that, per some family reasons, I’m moving back to the east coast.
I can’t refinance my condo b/c it’s so severely underwater (nor do I really want to, I’m fine w/ the terms of my loan).
I can’t conduct a short sale or turn in the keys (or any other such bank-sponsored program), b/c I cannot demonstrate a financial hardship (at least not yet). My situation is quite the opposite at the moment, I’m enjoying much financial security!
I could rent my condo out, but given current market rates, I’d still be eating about $1K a month (factoring in property taxes, community fees, maintenance). That considered, I really don’t want to keep this condo.
And so, I’m considering ‘walking away’ from my condo (i.e. purposely not paying the mortgages, going into default and allowing the bank to foreclose).
Now, I know this’ll dramatically reduce my credit score. I know this’ll brandish my credit w/ a foreclosure, that’ll preclude me from buying anything in the next 7 years.
But I think I’m ok with this. I don’t intend to buy anything for another 7 years, and I think I can rebuild my credit.
Not only that, but I think I would have to hang on to my condo and rent it out for a good 7-10 years, hoping it would go back in the black, for me to sell it and make a decent profit (or just break even!).
So whether I ‘walk away’ from it or keep/rent it out, I’ll be in the same place in 7 years (assuming I work on repairing my credit, in the walk-away scenario). Heck if anything, if the economy continues to decline along with the RE market in SOCAL, walking-away may be the clear better option.
What do you think?
Thank you for any input.
First of all, it doesn’t matter if you are ‘underwater’ unless you need to sell.
People are ‘upside-down’ all the time on car loans and it doesn’t freak them out.
The bank never agreed to be your financial partner and assume risk with you. The bank agreed to lend you money and you agreed that you would repay it. If you are able to do so, you should. If the property was worth 125% of what you paid for it (i.e. a 25% profit) would you be looking to share that with the bank? Why do you think they should take YOUR loss?
You can’t walk away with no penalty. That’s because you borrowed the money and YOU agreed to pay it back. When you don’t pay it back, it shows you are irresponsible with money and not a good credit risk.
There are four levels of things you can do if you have to sell. The further down the list you get, the more damage it does to your credit.
#1 – come up with the difference out of pocket at closing. Not terribly attractive, but does no damage to your credit.
#2 – get the bank to agree to a ’short sale’. From a bank’s point of view a short sale is a loss mitigation technique – meaning they think they’ll lose more if they don’t do this. This is why they have means testing for a short sale and why you already have to be delinquent in payments.
#3 – deed-in-lieu of foreclosure. A ‘voluntary’ foreclosure. Saves the bank attorney fees and a court date. Trashes your credit.
#4 – full foreclosure. The bank hires and attorney and goes to court to gain ownership.
In cases 2, 3 and 4 there is a deficiency. They can come after you for the balance. In some states it is difficult for them to do so and they may choose to forgive the balance. If they do, they will almost certainly send you a 1099 next tax season where the amount forgiven counts as income to you (and now you have a real tax problem).
There is no ‘walking away’
So your job situation and your moving really does throw a wrench into the whole situation. If you choose to become delinquent and allow the condo to be foreclosed on, your credit score will probably drop to below 500. Credit scores affect even more than your ability to access credit (which will be no credit for a few years). Insurance companies use credit scores to determine rates (lower credit scores = higher claims and more cost for the insurance co., and they know it). Potential employers can check credit and deny you a job because you are a poor credit risk. This is especially true of management type jobs where you have access and opportunity to steal from them. Employers consider people under financial duress to be bad employee risks.
This situation is exactly why financial pundits all agree that you should have ~6 months of expenses saved in a savings account. If you had this, you could land another well paying job in that amount of time (probably anyway).
All of your hard work in doing the right thing financially will go right out the door if you are foreclosed on.
good luck!
Income is not reported to the credit bureaus, so how much money a person makes has ZERO impact on their credit score, it has to do with how they use credit and pay their bills.
You live in San Diego…that is a pretty pricey place to live. Before you destroy your credit, if your condo was gone tomorrow and you had to RENT another place….what would the payment be? The same or significantly less?
If it’s going to be about the same, then you are crazy for giving the condo back…in a rental situation, you’ll never own the rental property…however, in an ownership situation, there will be a day when you will pay off the loan….unless you keep borrowing against the condo.
There is no difference.
The market will eventually bounce back, but people are expecting it to happen yesterday.
That is unrealistic.
I didn’t read the other answers, but I think you grossly and severely misunderstand the ramifications of “walking away”.
You have signed a legal contract to pay the lender what you owe them. Walking away does not mean some credit entity lowers your score. It means a warrant goes out for your arrest. It means you go to jail. It means the lender uses your social security number to track you down, and then prosecute you to the fullest extent that lender s willing to go. At a minimum it means that in 10 or 15 years, if you ever recover and get back on your feet (and assuming the lender is still around after all the deadbeats “walk away” from their loans), your lender can come after you for principal, interest, and penalties long long after you had anything to do with the condo.
Best thing you can possibly do is talk to a bankruptcy lawyer. He/She will be able to broker a deal where you only have to pay back a portion of what you owe, over renegotiated terms. You will (1) lose your asset, (2) have to pay back some portion of the loss after the sale of the asset, and (3) have a significantly lower credit score that will affect your credit card, car payments, etc – basically any lending situation. But it’s a hellavalot better than jail.
I would speak with an attorney that specializes in short sales. I am a Realtor in Florida, and we short sell clients homes that have good jobs, each case is different. A short sale will be better than a foreclosure. I would not file Bankruptcy, that will hurt you worst than a short sale or foreclosure. This is your primary residence, so you will not be 1099 by the IRS. A good short sale attorney will tell you if this can be done or not. Also, people have many opinions, speak with a professional, and let the attorney recommend a Realtor that they work with. We will be out of this housing recession roughly by 2010. If you can hold on I would.
I’m afraid SmrtBlond is actually anything but. Debtor’s prison went out with the Midieval times. I take her side on one thing though—it angers me that someone like you, who can still boast about enjoying financial security, would even consider walking away from his responsibilites because they might some day be a little inconvenient for you. This whole housing crisis started because people (mostly in California and Florida) did exactly what you now want to do too. Are you not aware that when you walk out on your financial responsibilities, it has a trickle-down effect that creates hardships on other people, or do you just not care? The rest of us are suffering from falling home values, millions of which are now valued at less than what is still owed. And, unlike you, most of those people have already lost their jobs, are NOT so financially cushy, and are actually making a back-breaking effort to KEEP their homes. And yet, you have the unmitigated gall to openly and unashamed speak of your plans to add to the whole problem. Oh, I’m sure it IS rather inconvenient to be so “underwater” on your condo, but so is everyone else. And for those of us who dont live in California or Florida, it’s especially annoying that we have to suffer for the bad decisions of others. I know my opinion doesnt matter….I just needed to “vent” on someone that I view as a part of the problem when so many others are busy looking for a solution.
In my opinion, you should consult a lawyer about bancruptcy. Losing your job will provide an acceptable reason for filing for bancruptcy and it will be easier to re-build your credit afterwards. It sounds like you need a fresh start. Re-locating to be closer to family is also a good idea for moral support. Good luck!
Even if you do not intend to buy any property for another 7 years, what about getting a car loan, or a student loan (if you get laid off and need to supplement your education?) With a foreclosure on record, you may not even be able to get a credit card. How about renting that vacation car? If you stand a good chance of renting the condo, this can be your best option.