Q: I have a very big problem with my property. I bought the house just right before the drop in the local housing market and now my wife and I are moving for a job opportunity.
We’re underwater by about $80,000. The biggest headache is that my brother-in-law is a co-signer on the loan with me rather than my wife. When my brother-in-law co-signed with me he had little income. Now he’s employed making good money.
He is not contributing to the mortgage and I don’t know what our best option is to sell the home. If we sell it, we’d owe the lender about $80,000 plus closing cost and the commission on the sale. If we try a short sale, I don’t know if the sale would be approved due to my brother-in-law’s high income.
What are my options?
A: Honestly, your options aren’t great. If you move forward with a short sale, your credit and your bother-in-law’s credit will be damaged substantially.
Before you make a move, you’ll have to sit down with your brother-in-law first and determine what his thoughts are and what he wants to do.
If your brother will hold it against you if you do anything that would damage his credit, you have to weigh that along with your financial options.
So what are your options? One option is to simply stop paying the mortgage. You’ll default on your mortgage and will (along with your brother-in-law) suffer the consequences of the default, along with the corresponding hit to your credit history and credit score.
This option is called a strategic default because you could still make the payments on this mortgage, but have decided it’s not in your best financial interest.
A number of real estate professionals have written about this option, with some maintaining that it is immoral and harmful to the community. Other writers have refuted those arguments and have claimed that a strategic default is not different than canceling a cell phone plan and paying the consequences of the cancellation.
It’s interesting that the issue of a strategic default hits a nerve with many of our readers. Some vigorously oppose anybody walking away from their mortgages when they have the ability to pay. Other readers will respond that a strategic default is just one option to consider. You will have to decide for yourself where you fall on this issue.
If you decide to go down this route, make sure you and your brother-in-law consider any legal implications. You may find a discussion with a real estate attorney to be helpful.
The second option is to sell the house at the price the current market can bear and come up with the money to pay off the lender. If tjat means that you have to come up with $120,000, you have to come up with that cash. You might be able to take a distribution from an IRA, borrow the cash from a relative, sell artwork or another asset.
Your credit and that of your brother-in-law, would be intact.
Your third option would be to keep the house and rent it – if you have a decent rental market in your area. You’d hope that the real estate market improves to a point at which you can either break even or pay less cash when you finally sell.
Your fourth option is to work on a short sale with your lender and your brother-in-law. Both of you would take a hit on your credit histories and credit scores. There may also be a tax issue for your brother-in-law, since he doesn’t live in the property as his primary residence. You should discuss the ramifications of this option with your respective tax preparers, an accountant or an Enrolled Agent.
Finally, if your brother-in-law lives near you, have you considered whether he would like to live in the home and assume the payments? If he does, you and he might be able to work out a deal. That deal could even take into account the upside down nature of the value of the home, which could work to his benefit down the line.
Also, you may want to talk to your lender and determine whether you can refinance the loan with your income alone. If you can refinance the loan on your own, you may be able to get a better interest rate and rent the home for positive cash flow while pricing in your area firms up. Refinancing at a super-low interest rate may give you additional options.
You should be aware, however, that lenders will not give refinance your loan if you have already listed your home for sale and if you don’t intend to live in the home for at least one year. So if you have to move now, the option to refinance may not be available to you.
Let us know what you decide to do.