Q: My son bought a Ft. Lauderdale condo a few years ago with 100 percent financing at 6 percent. He pays private mortgage insurance (PMI), so his effective interest rate on the loan is 7 percent.
The property is worth about half of what he paid for it and he can barely make payments without a roommate. He considered walking away from the home or doing a strategic default or short sale but he is a certified public accountant (CPA) and we heard it would kill his future job change opportunities. Does it really hinder future employment?
We have also considered pulling money from our savings and his to help him pay down his loan and refinance at 80 percent of the condo’s current value but that would take $90,000.
What options would you recommend to us? Thanks in advance for your advice.
A: It’s unfortunate that your son bought a South Florida condo at the height of the market boom. The property has fallen in value, and so it seems has his income.
As a CPA, I would have expected him to be a little more conservative, but the mindset when he bought was that home prices were going to go up forever, and you were foolish if you weren’t jumping both feet into a real estate investment.
Your son could try to do a short sale or walk away from the property in a strategic default. With either of these options, or with a foreclosure, his credit history would have a big black mark for up to 10 years. If a future employer pulled a copy of his credit history, the hiring manager would see that your son has had some serious financial trouble.
Some consumer advocates are arguing that employers should not be able to pull copies of credit histories at all (currently, an employer may not pull a copy of someone’s credit score).
While some states have outlawed the practice, it seems likely that a company would want to check the credit report of its hires that deal in financially sensitive areas, including those who handle cash, like bank tellers, or help manage other people’s finances, like financial advisors or CPAs.
It’s likely that your son will always have his credit history pulled before getting hired, so he may have to explain this financial trouble for some time to come. Still, so many Americans now have lousy credit that I don’t know if a poor credit history will tank a job search. But, it won’t help.
Your son is facing some tough choices: He can try to get a loan modification (which is unlikely if his home is that far underwater). He can keep making his payments, and plan to pay down and refinance the property. Or, he can walk away and do a strategic default.
If he chooses a strategic default, either through a deed-in-lieu of foreclosure or a straight-up foreclosure, he should hire a good real estate attorney who has expertise in this area to negotiate with the bank and make sure that once this goes away, it goes away forever. He doesn’t want to pick up the phone a couple of years from now and listen to a collection agency tell him that his old debt is coming back to haunt.
Strategic defaults without consequences are easier in some states than in others. In some states, if you walk away from your home, the lender has the right to foreclose on the home and satisfy the debt you owe the lender with the proceeds from the sale of the home and that’s all the lender gets.
In other states, the lender has those same rights, but can also sue the borrower at a later time for the deficiency that was left behind when the lender foreclosed on the home, sold it and didn’t make enough money from the sale of the home to pay off the debt. And, in Florida the lender may have the right to come after your son for the deficiency should he decide to move forward with a strategic default.
Your son has to decide what’s worse – having his credit history damaged or taking an extra dozen years to rebuild his finances. As a CPA, your son will have to decide whether the smart move is to cut his losses and move on and take the risk of the problems with his credit and credit score or continue paying on the debt he owes.
Let me know what he decides to do.