Q: I have excellent credit (my credit score is approximately 790). I need to move because my income went down and I want to find a home in a better school district for my children.
I have been working with the bank on taking back my home or doing a short sale. The problem is that the lender believes that I can afford my home based on their calculations.
I want them to take the home back and forgive part of the debt. I am ready for my credit score to go down, and prepared to do what takes to get it back up.
What are your thoughts? What’s the proper way for me to speak with the bank? Should I get a lawyer?
A: You seem to be under the impression that if you just tell the bank you can’t afford your home, the bank will take it back and will wipe out any debt.
That isn’t exactly how the terms of your loan read. You agreed to pay back the bank on a regular basis over a specific period of years. The fact that you want to find a home in a better school district is irrelevant. The fact that your income went down may be more relevant, especially if the lender believes you can afford your monthly payment.
The bank will not take back your house if they think you can afford it. So, you can walk away and mail back the keys and stop paying your mortgage.
This will destroy your credit and it will take you years to rebuild it. In addition, once you have a foreclosure, bankruptcy or even a deed-in-lieu of foreclosure on your credit history, it will take 3 to 5 years for you to be able to qualify for another home loan from Fannie Mae, Freddie Mac or FHA. (These three entities account for roughly 90 percent of all loans granted these days.)
While the bank may feel you have the means and ability to afford the loan payments on your home, you need to assess your own situation. You need to evaluate what your income is and then determine your expenses.
Depending on your circumstances, you may have expenses that are significantly higher but that the lender ignores for purposes of computing what you can afford to pay.
In some cases, homeowners spend too much money on certain living expenses that the lender would say you can cut out. For example, expenses for cable TV, cell phone services, entertainment and other expenses could be used to pay the lender.
On the other hand, if you have a child with a chronic illness, the lender may not factor medical expenses into the equation even though you do not have the option to cut them out.
You should write down a budget of what you spend on a monthly basis and what you spend on your housing expenses during that same time. You may find that the bank is right and that you can cut out some expenses and continue to make the payments on the loan.
But if you find that you have cut as much as you can and there are certain expenses you can’t or are unwilling to cut, they you will have to make the decision whether to take your chances with the lender by defaulting on the loan and moving on or keeping current on the loan with your lender.
Spending some time with a real estate lawyer will provide guidance and some perspective. I encourage you to find one.