Can honor ever exist in a strategic default or foreclosure when you have an underwater mortgage?
Q: My wife has a home that we currently live in that she purchased back in 2003. We find ourselves in a place where we can no longer pay for the house. Is it possible, instead of a nasty foreclosure, to give the house back to the mortgage company?
Also, if we do give it back and vacate the home what are the consequences of doing this? Ultimately, we want to know if a loan modification or mortgage restructure is not possible and we know ahead of time that we cannot keep the house and want to honorably give it back. Do we have any options?
A: First of all, you should know that you own the house. It it’s your home and not the lenders. You can’t give back a house to a lender since the home is yours.
While you may think that there may be no distinction between owning a home and having a loan on that home, for business and legal purposes, the home is yours to keep, maintain and to make a profit or loss from it.
At issue in your circumstances is whether the lender would be willing to accept the home in exchange for you and the bank becoming involved in litigation involving the foreclosure of your home.
When you purchased the home, you signed documents with your lender by which the lender agreed to give you the loan and you agreed to repay the loan over the term of the loan and on the terms set forth in the loan documents.
You weren’t specific in your email about why you are no longer able to pay the expenses associated with your house. You might have lost your job, become ill or had a death in the family or decided that the home’s value is now less than what the home is worth and you can’t or won’t continue to make the payments.
Each of these situations may evoke different sympathies from lenders, your neighbors and people in your community.
However, the contract you entered into with your lender does not provide for exceptions or distinctions. In other words, the fact that you lost your job doesn’t matter legally to the lender.
If you fail to make your loan payments, the lender has the right to initiate legal proceedings against you to recover what is owed. Those legal proceedings are generally foreclosure proceedings leading to a sheriff sale, auction or other sale of your home.
When you miss payments, that gets reported to the credit reporting bureaus. You can expect the foreclosure process to result in a fairly big drop in your credit score used by lenders, employers, insurance companies and others in evaluating the pricing for products you may want or your employment prospects.
By the way, you’re not alone there are plenty of people that are underwater in their mortgages. In fact, there are even lists for the top states with borrowers who have underwater mortgages.
In addition, if you go through the process of foreclosure or other transaction with your lender that results in your lender labeling your file as not having been paid in full or settled for less than the full amount owed including a strategic default, you may find that no lender for will give you a loan for up to five years.
Unfortunately, your lender may also have the ability to sue you for any amount of money that is owed above and beyond what is collected during the foreclosure sale. So, watch out in years to come because many lenders are selling these deficiencies to collection agencies.
But under the documents you signed with the lender, you may have the contractual right to take any of these actions and bear the consequences.
On the issue of whether any of your actions are honorable, you will have to decide that issue for yourself. We’ve written extensively about this issue in the past. When a home is foreclosed, the price it garnishes in the market is generally far below what the home may get when it is sold to a buyer in the ordinary course of a real estate transaction. Your neighbors may feel that your actions are not moral and are not honorable. Your community may feel the same way.
For this reason, some communities now see short sales as bad but not as “morally” bad as when home owners walk away from their homes, leave the homes abandoned, and the lenders come in and have to sell the homes at rock bottom prices.
One last side note, you can certainly try to see if your lender is willing to modify the terms of your loan. Call a HUD-certified housing counselor to evaluate your options (the toll-free number is 888-995-HOPE). Or, you can get more information on the Making Home Affordable website for HUD.
You should contact your lender sooner rather than later. But if the reason you are unable to pay your bills is because you’ve lost your job, you may find it impossible to get a loan modification.