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

Foreclosure

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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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2010/04/11 at 9:30 pm

{ 19 comments… read them below or add one }

bigjobsboard 2010/04/06 at 5:14 am

thanks for sharing this article. I am not in such situation now but it is better to know what to do if the time comes a situation like this would occur to us. Thanks for sharing.

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TheMadTurtle 2010/04/06 at 6:15 am

Regarding selling your home – especially if you’re so upside down in it – I heard yesterday on NPR that the Obama administration is looking into incentives for banks to accept a “short sell” on the home. A short sell is selling the home for what it’s currently worth on the market. The incentive for the home owner is that they walk away from the mortgage and the incentive for the bank is that they cut their losses. Often, if a home is repossessed, the bank incurs all kinds of expense due to maintenance of the home while they try and get it back on the market. A lot of the time, they can cut their losses by putting another owner in the home with a reasonable (fair market value) mortgage. I think the incentives were some cash to the bank and I think it was $3K to the home owner to cover a few months’ rent while you’re looking for a new place.

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paul 2010/04/06 at 8:13 am

No I hadn’t heard that story yet. My real fear with something like this program is that it will be similar to the making home affordable program which hasn’t been a huge help for those who are struggling the most. If the banks really do see it as an advantage then it has a chance but without their buy in it’s doomed before it’s begun.

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Kevin@OutOfYurRut 2010/04/06 at 7:37 pm

I agree. The last thing we need is another bailout in disguise. The intentions may be good but the end result is usually enabling irresponsible behavior.

Short sales have been accomplishing the same thing though the banks could do with making them easier.

Deacon Bradley 2010/04/06 at 8:44 am

Great to hear someone pointing out all the bad things that come with walking away. I also find it troubling that people are willing to walk away and give up. Dr. Stanley studied first generation millionaires in his book The Millionaire Mind and found 38 correlating statistics among them. Number ONE was integrity. Doing the right thing EVERY time ALL the time is the number 1 indicator in your character towards you becoming wealthy. I think people discount this sound advice and instead think they can finagle their way to success.

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Kevin@OutOfYurRut 2010/04/06 at 7:40 pm

Good point. Irresponsibility caused the housing bubble on the way up and it’s greased the wheels on the way down. We can’t embrace that.

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Budgeting in the Fun Stuff 2010/04/06 at 11:39 am

We weren’t hurting for money, but we rented out a spare bedroom for 2 years for about $500 a month. That’s 2/3 of our mortgage! I wrote a post about it last week…I highly suggest it for anybody seeking semi-easy money (lack of privacy and one crappy roommate convinced us to take a break for a while).

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Kevin@OutOfYurRut 2010/04/06 at 7:42 pm

What it comes down to is that you have to do what you have to do and sometimes that means making sacrifices that will feel uncomfortable. Congratulatoins on doing the right thing!

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Manny 2010/04/06 at 7:29 pm

I know of some people who already did your first tip of taking in a boarder. A little sacrifice in privacy, but it can result in a big relief from the financial stress. An extra $500 a month can be a lot for financially strapped individuals.

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Kevin@OutOfYurRut 2010/04/07 at 4:52 am

Manny, I think that at a minimum a boarder should be attempted before walking away from the property. It’s not a perfect situation, but at least it represents a legitimate effort.

If you lose the house anyway you can know that you made a real effort to avoid it. The “deer in the headlights” thing seems to be prevalent in foreclosures, but what’s really needed is a plan with concrete steps.

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TheMadTurtle 2010/04/07 at 7:06 am

Kevin, I’m confused by your comment:

“I agree. The last thing we need is another bailout in disguise. The intentions may be good but the end result is usually enabling irresponsible behavior.

Short sales have been accomplishing the same thing though the banks could do with making them easier.”

On one hand you call this plan to give banks more incentive to accept a short sell as a bailout and then you follow it up with saying short sales are good, but they should be easier. So, offering a government incentive doesn’t do that? Or are you just saying short sells are good but the big ‘ole govment should stay out of it?

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Kevin@OutOfYourRut 2010/04/07 at 8:10 pm

I’m saying we already have short sales, but they need to be streamlined, as opposed to adding yet another government program. Some how those programs seem to overshoot the mark and cause bigger issues.

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Dan 2010/04/07 at 10:32 am

I agree with having personal integrity as Dr. Stanley says in his books. When my home forecloses, I will know I’ve done every possible thing I can to save it. Extended job loss required we put it up for sale, we haven’t been able to make up the difference like Fiscal Geek stated in his article. We’ve had it on the market for over 2 years, and we’ve had multiple short sale offers from buyers. The bank has refused to accept or even acknowledge that they received our paperwork (the 7x we sent/re-sent it in (no kidding)). Eventually the buyers walk away after waiting for 6 months, with no progress being made, despite our best efforts. We called the bank everyday for months on end. Every time we call we’re unable to speak to anyone with a brain or decision making power, we are transferred around and around so many times it’s laughable. We’re told we are being transferred and then purposely disconnected. Being told lies is common. It’s a complete joke, and is such a shame to have 3 offers walk away. But in the end, I know I’ve done everything I can to prevent this. It’s out of my hands now, and I’m o.k. with it. Short sales are not as easy as 1-2-3.

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paul 2010/04/07 at 10:36 am

Dan,
So sorry to hear your story. You indeed have gone above and beyond and my heart goes out to you as you walk this journey. I wish I could say your bank horror stories are uncommon but my experiences with them have echoed your situation. Here’s to landing solidly on your feet and moving into your next stage of life.

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Dan 2010/04/07 at 2:47 pm

Thanks for the encouragement. We’ve learned so much through this trial, that’s the bright side to the mess. We’re headed in the right direction and that’s exciting. I can actually say I’m looking forward to the future and what’s ahead.

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Kevin@OutOfYourRut 2010/04/07 at 8:14 pm

Dan, in the post I wrote “There may be a time and place when just picking up and walking away IS the right thing to do”–it sounds like you’re one of those exceptions. You’ve done your part to make it work and the bank is effectively saying NO.

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James 2010/04/16 at 4:35 pm

wow this was a powerful read. thanks i like that you really speak the truth people show hear this.

foreclosure is so sugar coated and i think you make great points.

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Kevin@OutOfYourRut 2010/04/16 at 8:18 pm

Sugar coated is a good description James. When ever an activity becomes common, it also becomes more acceptable but that doesn’t make it right in all cases.

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Power 2012/05/10 at 10:29 am

The bank may accept a much lower payment than you think, as them, something is better than nothing.

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