Dear Ken,
WE ARE thinking about walking away from our home. We purchased our home in 2005 for $457,000. In December of 2006 we got a 2nd mortgage HELOC of $85,000. Maxed that on credit card debt and medical bills. In January of 2010 I lost 10% of my pay because of the recession and my husband would work over time all year up until then too. So we lost all that money as well. We were very dependent of his OT. We fell behind on our 1st mortgage. The most was 3 months behind. Finally in November 2010 we got approved and accepted a loan modification on our 1st mortgage with BOA and the new payments were reduced by $400.00. I never notified my 2nd bank HELOC or ever fell behind on payments with the 2nd loan. I am only paying the minimum interest payments. My 2nd loan is with my Credit Union that I have banked with for 20+ years (dont know if that matters). So now I have fallen 1 month behind on my 1st mortgage with BOA. Still paying my 2nd on time. Have looked onzillow.com to see that my home is currently worth on their website $291,700. It needs a ton of work not to mention. Needs a new kitchen as I think its the original kitchen from when the house was built in 1960. We don’t think it’s worth paying for something that is worth almost 1/2 of what we owe on it and not to mention the additional money it needs to fix it up.
Can you help me? I so look forward to your advice.
PJ
Dear PJ,
Thank you for writing.
In our previous posts, we placed an emphasis on understanding the financial risks and consequences of a strategic default. Before we discuss the risks and rewards, let’s focus on what you want to achieve. In other words, what do you plan to gain from a strategic default? Our site has always maintained that the primary purpose of a strategic default is to preserve cash, savings, and wealth. Ultimately your goal should be to place you, your family and/or your business in a better financial position.
In your situation it appears that by strategically defaulting you will free up available cash for other uses.
First things first. You need to develop a sense of direction. This will help you put your mind at ease. As you gain a better understanding of your objectives you will gain confidence and understanding. With great awareness, you be will able to execute an optimum strategic default based upon you unique circumstances.
You will need to create an action plan. A well-thought out action plan will help you better allocate time and resources towards a strategic default. Discuss with all your family members, be completely honest.
So get a pen and paper and ask yourself the following questions:
1.How much money will you save if you strategically default and what will you do with the extra cash? Save up if your are not paying your mortgages.
2.If your first mortgage lender does not get all its money at a foreclosure sale, will you face a deficiency judgment? Please read this article on the Difference Between Recourse and Non-Recourse States to learn more about anti-deficiency rules and regulations. Read about the Debt Relief Act of 2007 for California properties.
3. What do you intend to do with the second mortgage/HELOC with the credit union? Are there benefits banking with your credit union? If yes, then you should plan to pay the entire debt. Keep in mind the credit union is most likely aware that it will not collect any money from a foreclosure sale. This means the credit union may sue you personally for the HELOC, if you do not pay the debt. Did you know that second mortgages and HELOCs can be settled for less than what is owed? If and when you decide to stop paying the HELOC, make sure to first contact the credit union to learn about various loan workout options.
4. Did you know that you can settle credit cards for cents on a dollar? Also, you can settle your medical bills for less than what is owed. Contact your creditor to see if they will accept a settlement. Your mantra should be “I know I borrowed $10,000 but I also know I can negotiate a settlement for $5000 or less.”
5. Do you want to live in your property as long as possible? How long will it take for the lender to foreclose?
6. Can you legally rent out a room or an apartment in your property to get extra cash flow? What about storage space? Can you legally get extra cash flow from your home?
7. Did you know that some lenders will pay a homeowner up to $30,000 to do a short sale? Learn about HAFA, they will guarantee $3000 at closing of a Short Sale.
8. Where do you plan to live once you need to move? Have you explored rental locations and costs?
9. What will be the tax consequences of your actions(if any)? Did you speak with a CPA or accountant? Did you learn about filling 982 forms?
10. Would you consider keeping the property if you can negotiate a principle reduction? In other words you can contact your lender and determine if they will negotiate a principle reduction. Remember to get any agreement to lower your mortgage principle in writing.
Now let’s look at the primary consequences of a strategic default:
Deficiency debt can lead to a deficiency judgment.Loss of the home or property to a foreclosure sale.
Fannie Mae implemented a rule that bans a person from obtaining a Fannie Mae mortgage if that person strategically defaults.
You can become personally liability for unpaid balances owed to local or city municipalities for electric, water, gas, housing violations, and/or sewer and unpaid balances owed for real estate taxes and homeowners Association dues. You need to be aware of any and all liabilities.
By answering the above questions your strategic default roadmap will become clearer. You will begin to take concrete action steps towards fulfilling your primary goals.
If you would like to learn more about our personalized consultations please email us [email protected]. All initial consultations are free. We provide references upon request.
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Call Ken Go of 1st Innovative Finance at (562)508-7048. Thanks again.