With an underwater mortgage, this senior homeowner is desperate for help. Thanks to the Great Recession, this older homeowner is struggling with selling at a loss or staying in their home.

Q: My mother is 90 and needs to soon move from her condo to an assisted living facility. She bought her condo at the height of the market boom for about $250,000 and it is now worth about $100,000 less than she paid for it. She has a mortgage and probably owes more on her loan than what the property is worth. Additionally, the market where she lives is slow and every month she must pay condo fees out of her fixed income.

My siblings and I are wondering what consequences she (or her estate) might bear if she were to simply stop paying on the mortgage and what other options she might have.

Underwater Mortgages and Old Age

A: In many parts of the country, the Great Recession is a thing of the past. Overall, home prices have risen some 40 percent over the last six years. Zillow reports that the median home price is $226,000 and is up 6.6 percent over a year ago.

If that’s what’s happening in your neck of the woods, good for you (and somewhat unfortunate for first-time buyers, though that’s another story). But it’s not the case in every metro area. Some homeowners have discovered that their home values have not even returned to where they were prior to the Great Recession.

Sadly, your mom is one of these homeowners. She bought a condo at the height of the housing boom and now owns a home that is underwater, meaning that it’s worth less than the amount owed on the mortgage.

It’s tragic at any age. But, it’s a really tough blow if you’re in retirement, and need to unload the property so that you can get the kind of care you need as you’re nearing the end of your life.

Your mom’s situation falls into the most unfortunate type of scenario. On the one hand, she owes money to her lender and on the other she has an ongoing obligation to pay assessments to the condominium association. She also owes real estate taxes (which we’ll assume are included as part of her mortgage payment).

So what should your mom do? Well, she could continue to live in the condo and pay its expenses. She could simply walk away from the unit and suffer the consequences of her failure to pay her mortgage payments and her condominium association assessments. She could try to rent her unit and cover all of her expenses (if her building will allow rentals). Or, she can try to sell the property.

The Best Option for an Underwater Mortgage

The best option is to sell. While the condominium isn’t worth what is owed on the mortgage, she can work with her lender on a short sale. For sake of discussion, Let’s say she owes $150,000 on the condominium and the market for a unit like hers is around $140,000. In this situation, she might only net $120,000 after paying closing costs and real estate broker expenses. She’d be short $30,000 of the true amount that the lender would normally be due. (Hence the term “short sale.”)

If she lets the lender know she’s likely going to be short, and the lender agrees to work with her, the lender might be willing to allow her to sell the condominium unit and take the $120,000 payment in full satisfaction of the $150,000 owed. This is probably the best case scenario for your mother.

Having said that, we don’t know your mom’s financial situation. Most lenders will want to see your mom’s financial picture before agreeing to let her off the hook on the loan. If mom has considerable assets, and has $30,000 that can be liquidated and used to pay off the lender in full, the lender may allow her to sell the condo but require the full payment on the loan as soon as the assets can be liquidated.

Renting the property would allow your mom to walk away now, and essentially leave you and any other heirs of the estate to deal with the ramifications after her death. At that time, if there are assets, they would be sold and the proceeds used to settle the debts of the estate, such as the mortgage and any credit card debt, auto loans, student loans, etc. If there are no assets, the property would be sold and the lender would accept whatever net proceeds are generated or the lender would accept the property in lieu of the debt.

We don’t usually recommend that homeowners walk away from their property. When they do, the lenders usually end up taking the home over and selling it down the line, but the losses pile up on what the borrower owes on the loan and the home frequently sells for far less than what your mom could sell it for by putting the home on the market.

In our example, if she walks away from the home, the lender will have expenses in foreclosing on the home, maintaining the home and paying all the expenses relating to keeping and then selling the home. All these expenses would be added to the amount owed to the bank by your mother.

Even if the bank took the property over and sold it to someone else for $140,000, the bank will likely incur similar expenses to sell the home, but will add to the debt owed by the borrower all the other expenses incurred by the lender. Say the lender incurs $20,000 in litigation and other expenses, your mom would end up owing the lender $50,000 rather than $30,000 given the short sale scenario. In some states lenders can sue the borrower to recover the amount still owed by the borrower or, in this scenario, $50,000 plus the costs of collection. (Are you or any other family members on the mortgage or title to the condo? In that case, the lender and creditors would look to you to settle up any remaining amounts owed by the mortgage.)

And, if you work with the lender on the short sale, you might even find an efficient (and compassionate) lender willing to approve the short sale quickly allowing for a new owner to move into the condominium and allow your mom to move on to assisted living without thinking about what to do with her underwater condo.

Good luck.

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