By Ilyce Glink and Samuel J. Tamkin
Q: We live in Clayton County, Georgia, where the housing market is still not good. Our home was worth $200,000 in 1999 now it is worth $51,000. We still owe $101,000 on a first mortgage and $19,000 on a second mortgage.
Every lender says we're too upside down. My husband is over 80 years old and has a permanent workers' compensation from the federal government. What are your thoughts?
A: Yuck. That's about the only way to sum up how we feel about your situation. We feel for you.
The problem is that there is no easy solution. While there is talk about the rebounding real estate market, you're so far underwater that it's unlikely that any rebound in the near future will increase your property values by about 120 percent, or enough to bring you whole.
Those low interest rates offered by lenders sure aren't going to help you. With your fixed income and owing more than double what your home is worth, we don't know of lenders that would be willing to help you. While you might qualify under some of the government programs, we have heard that few borrowers actually get loan modifications that really work for them, if they get one at all.
Depending on when you obtained your two mortgages, the impact of any loan modification may change. If you've had your main loan for 15 years, your monthly payment now is mostly going to pay down principal. However, the real issue is probably not the loan modification or a new loan. Even if you were able to refinance both loans into one loan at 4 percent, you'd still have debt of about $120,000 on a home worth less than half that amount.
At the age of 80 and now thinking about moving from a home to a condominium in Florida, the decision you need to make is whether to stay and keep this home or sell it and move to Florida. Whether you sell now or in a couple of months, it's unlikely that your home's value will increase enough to cover the loan and closing costs.
What you are looking at is a short sale. That is when you sell your home for less than it is worth. If you have the money to cover the shortage, you don't need your lender's consent for the sale. You'd have to come to the closing with the funds necessary to pay everybody off.
If you don't have that kind of money, then you'd have to consider the lender-approved short sale route. If your two lenders agree to the short sale, you can move on with your life and leave the home to new buyers.
Your current lenders have two options. One option would have them wipe any deficiency you owe them clean. That would mean that the lender wouldn't get paid off in full, but it would forgive any amount remaining.
The other option is that the lender (or one of the lenders) refuses to wipe the debt clean and could still come after you or send your loan to a collection agency. You should also know that your credit score will take a big hit as a result of the short sale. However, getting on with your life might be more important at this stage than having a great credit score. After a couple of years, your credit score should recover.
If the lender does send your debt to a collection agency, the collection agency could sue you for the amount owed. With that judgment, the collection agency could try to go after your assets. While retirement assets are protected, any other assets, such as bank accounts and cars owned by you, could be used to pay off the debt.
While we know there may be lenders out there aggressively collecting debts, we have anecdotal evidence suggesting that lenders have bigger issues these days than trying to collect on a debt of the size you might owe after a short sale.
Your instinct to buy a new condo in Florida and then let this house go into foreclosure might be the right move for you. Again, your credit will take a big hit for a few years, but if you don't need credit to buy anything, it should be fine.
Or you could buy the new property and then rent this one out as long as you can cover all of your expenses, and then some.
Sounds like you need to put all of your options on the table and create a pros/cons list and then decide as objectively as you can which direction is the right one for you.
(Ilyce R. Glink is the author of many books on real estate and host of "Real Estate Minute" on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her Web site, http://www.thinkglink.com.)