My cousin is considering foreclosing on his house...?

Question

I don't think this is a good idea, but given thier current situation, I'm not sure. They owe more on thier house than it's worth, about $50,000 more, so selling it won't work. He mentioned just letting it go into forecloser to get out of it. It's not the greatest house. I really don't think this is wise and am trying to think of other ways to help him get out of this mess. Any thoughts? How long does it mess up your credit and do people really choose to foreclose??

Answer 1

Assuming your cousin has the ability to make payments on time if the lender(s) would work with them, needs to continue living in the same local area and can benefit from the tax advantages of ownership of this home, they should approach the lender with an offer to stay if back payments are forgiven, the loan amount(s) are reduced to the current value of the home and perhaps a reduction in the interest rate and/or monthly payment as well. To be fair to the lender they should also agree that the forgiveness of back payments, the loan reduction and other terms changes would be rescinded if they became late on payments again. I am assuming of course that they aren't the ones that made it "not the greatest house" by their actions or in-action. If they are going to allow it to be foreclosed on they should go to the lender(s) and sign over the house via a quit claim deed or some other document as long as the lender(s) agree to not pursue a deficiency judgment against them (in writing of course) and possibly not reporting them negatively to any credit bureau's. They could also immediately become tenants on a month to month rental agreement or a lease agreement if the lenders agree. The advantages to this approach of working together with the lender(s) saves everyone time and money and is by far the best way to make lemonade out of life's lemons.

Answer 2

Maybe they should try talking to their mortgage company to see if they can work out an arrangement to make their monthly payments affordable. If they move, they will have to buy another house or pay rent, so it would be good if that money were going into paying their present mortgage. I would try to hang onto the house if possible, hoping that the housing market will improve. If they foreclose, their credit rating will be terrible. Could they move somewhere and rent the house, after using some paint and sweat equity to make the house look better?

Answer 3

Yes, people can opt to allow foreclosure. I consider it a pretty dishonest choice.

There are almost always other options. He can find ways to make the house more attractive so that it will sell. If you watch the home improvement shows on cable TV, they're filled with ideas for getting more out of your house sale, and it doesn't have to cost much.

He can find a way to continue to make payments, perhaps by taking in a renter to help cover the mortgage.

He can talk to the bank. They don't want to foreclose if they're going to lose money. The bank may be able to work with him on the payments.

Answer 4

1. no tax- if its their first house-
2.credit will be destroyed for at least 7 years
3.owning a house is always better than renting
4. i would keep the house for a 3-4 years until the inequity level evens out. then sell .
5.try to keep the house in great shape or try to fix things that matter. ie. driveway,roof,windows,lawn. start from the outside for appeal. then put it in the market.

Answer 5

Fyi......There are tax consequenses to keep in mind.

The difference between what is owed on the house and what the bank sells it for is considered income for tax purposes. For example: If the house is worth $200,000 and they owe $250,000 but the bank sells if for $180,000 to get rid of it, the differences of $70,000 ($250,000 - $180,000) is taxable to the former owner. This can be a very painfull lesson come tax time.