When Your House Payment is Killing You Should You Walk Away?



in Mortgage

Almost lost in the news about an improving economy is the reality that the foreclosure crisis is continuing to grow. Foreclosures, which reached 2.8 million homes in 2009, are expected to top 3 million for 2010.

One of the most debilitating aspects of foreclosure is that it’s cumulative in nature: you might be losing your home today for a job loss or financial reversal that occurred a year ago or more. A new job can improve your prospects going forward, but it won’t cure a six month deficiency in house payments in enough time to prevent a lender from taking the house.

Why not just walk away?

It’s a sad statement on our times that walking away, or “mailing in the keys”, to let the bank take over the property, has developed into a viable option to personal housing troubles. There are even websites set up not only to discuss walking away, but also the best ways to do it!

So why not just walk away? Isn’t it easier?

Easier perhaps, but certainly not beneficial. Here are a few reasons why you might not just want to walk away:

  • Housing options will be limited for at least a few years. Not only will it be difficult for you to buy another home in the future, but it may also cause problems in finding a landlord willing to rent to you.
  • Your credit will be damaged. A mortgage is the single biggest credit reference on your credit report, and a foreclosure is a heavy hit. This can affect not only your ability to borrow, but also to get a job or open a bank account.
  • It will damage your standing in the community. When we buy a house, we’re not just buying a plot of land with a structure on it, we’re also buying into the community where it’s located. That community largely houses and defines our social lives; but lose your home in foreclosure, and you will almost certainly need to abandon that community and the people you know. That can be more painful than losing the house.
  • It will damage your self-respect. No matter how common and accepted foreclosure might be, it still carries a message of “I failed”. No one ever likes or wants to make such an admission and if you’re already reeling from financial troubles, foreclosure will only add to the stress.
  • Foreclosure turns control of your life over to others. It’s a legal process, and once initiated, the flow of events will mostly be beyond your control or time frame.

There may be a time and place when just picking up and walking away IS the right thing to do—maybe the only thing to do—but it should never be done until all practical options have been explored and at least attempted.

Try These First

There are phenomenal emotional issues confronted by anyone facing the prospect of foreclosure. Though it’s a word describing a legal process, it conjures up very real prospects of displacement, isolation and even homelessness. If those are the stakes, we should be ready to do what ever is necessary to avoid it, even if those options might make us uncomfortable or “violate our space”.

1. Take in a boarder. Would an extra $400 or $500 per month give the breathing room you need? Sounds almost old world, but this is perhaps the fastest and easiest way to cut your effective house payment. If you chose this route, check with local ordinances to make sure you won’t be in violation of any local laws. Many communities restrict the number of unrelated adults living in a single living unit, but if that limit is a least one more than you have now, renting to a boarder could be the way to go. You’ll sacrifice some privacy, but maybe retain control of your home as a result.

2. Invite extended family to move in with you. In the economy as it is today, many of us have family who are in difficult financial circumstances. Are there any you might feel comfortable inviting to live with you until both you and they are back on firm financial ground? It might be difficult to have an entire family move in, but it could work well if it’s a single person or even a couple. It can be both more invasive and financially beneficial than having a boarder, but it might be worth bearing for long enough to keep you from losing your home. Back in my grandparents’ day house sharing arrangements weren’t at all unusual, and today we generally live in larger homes with more bathrooms.

3. Rent out your home and move to cheaper quarters. If you flat out can’t afford the payment on your home, it might be best to rent it out to someone who can while you uproot and move to a less expensive home until you get back on your feet. If the payment on your house can’t be covered by the going rents in the area, look into offering it to employers as corporate housing for their temporary transfers. A short term move may be easier emotionally as well as give you something to work for.

4. Sell the house. Many people never dare to allow themselves to think of such a possibility and busy themselves with schemes to keep the property a little longer—until the sheriff arrives and posts a foreclosure notice on the house—and by then it’s too late. Don’t wait until your situation is so far gone that foreclosure is inevitable

It might be better to put the house on the market as early in your time of trouble as possible, that way you’ll make some headway even while you’re trying to work out other solutions. Should you come upon a better option, or if your big picture financial situation makes a radical turn for the better, you can always take the house off the market.

Remove all excess clutter, keep the house clean and orderly, make any necessary cosmetic improvements, price the house on the low end of the market range and list with a discount real estate agent. Under the best of circumstances, selling a house is no easy proposition and the more time you allow for it the better.

Selling your home in advance of foreclosure is a radical step, but far better to take that step than to do as so many do in hoping against hope that a last minute miracle will save them. Often, just having a plan in place gives you both more confidence and more options in dealing with a difficult situation.

The first three suggestions are temporary solutions to get you through what is hopefully a temporary problem. If however, the problem looks to be something other than temporary, then a permanent solution—selling your home and moving to less expensive digs—is the only realistic approach. If so, it’s best to do it as soon as possible, while you still have some control of the situation and an opportunity to preserve options on the way out.

What counsel would you offer to someone in danger of losing their home? Can you think of other ways to avoid it? Is walking away a viable option?

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.

(Photo Courtesy respres)

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