The Big Move: My in-laws are underwater on their mortgage and their home is in disrepair. Should they just walk away and move in with us?

Shortly before the pandemic, my husband accepted a job that required us to move out of state; however, we haven’t had to as of yet because of telework. My husband and I have two young children. Due to our telework, my parents-in-law have been watching our children at our home and they often stay over for days at a time.

My husband and I have asked his parents to move in with us, once we move. In theory this is a great plan for all involved: free childcare for us, reduced expenses for them and we all enjoy each other’s company.

The dilemma is that my in-laws are $50K underwater on their townhome. The home has water penetration and foundation issues that make it only worth about $100,000, at best. My father-in-law is a very disciplined man and does not think walking away is the correct thing to do. He thinks continuing to pay the mortgage is the best plan, even if they are not living in the home.

A short sale, even if a buyer would be willing to take on the issues, would be devastating to whatever savings they have. My husband feels that walking away and them taking the credit hit of foreclosure is the best option. They would be living with us and no longer have the mortgage payment hindering them.

In addition, my husband is the only child and the named executor of the estate. My husband realizes that whenever his father dies (he’s 71), that the home will be his issue to handle. Should my father-in-law continue paying or walk away?  Are there other options that we should be considering?

Sincerely,

A concerned daughter-in-law

Dear Concerned,

Your letter is an important reminder that even at a time when home values are increasing at a record pace, many Americans continue to owe more on their mortgages than their homes are worth, also known as “being underwater” on a home.

Millions of Americans found themselves in this position in the wake of the subprime mortgage crisis that caused the Great Recession. But even though home prices have risen — in many cases to new all-time highs — some 1.6 million homes are still in negative equity as of the third quarter of 2020, according to the most recent data available from CoreLogic CLGX, +0.38%. That represents roughly 3% of all mortgaged homes nationwide.

Walking away from a home that’s underwater is an ill-advised move, no matter which way you cut it. And practically any financial expert would advise your family to avoid it at all costs.

For starters, foreclosures are absolutely devastating to a homeowner’s credit score, and they remain in a person’s credit file for seven years. You may be thinking, what difference does it make? Well what if your new living arrangement doesn’t work out? Your family and your in-laws have only been spending short stretches of time together — that’s very different from permanently cohabitating.

If your in-laws decide they need their own place, they may have trouble qualifying for a rental with the low credit score they’d have post-foreclosure. Are you and your husband ready to act as guarantors for them in such a situation?

Foreclosure isn’t a get out of jail free card. You’ve written off the possibility of pursuing a short sale because it would hurt your in-laws’ savings, but that’s just what could happen with a foreclosure.

“Depending on the laws in their state, the lender could foreclose on the loan, sell off the property, and come after the parents for a deficiency judgment — the difference between the sales price and what was owed on the loan plus taxes, insurance, fines and fees,” said Rick Sharga, a mortgage industry veteran and executive vice president of real-estate data firm RealtyTrac.

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Federal law specifies that retirement savings in company-sponsored retirement accounts such as 401(k)s are exempt from garnishment by creditors in the case of a deficiency judgment. Some states extend this same courtesy to self-directed retirement accounts.

There are also moral and ethical considerations. Your in-laws signed an agreement with the mortgage lender, so it’s understandable that your father-in-law feels duty-bound to hold up his end of the bargain. Plus, research shows that foreclosures can sink the property values of nearby homes.

What to do instead? Well, for starters, you all should explore whether your in-laws qualify for any forms of assistance to make the necessary repairs to their home to bring it up to a sellable state. If either of your in-laws is a military veteran, they may be eligible for assistance through Operation Homefront. Other resources they can investigate for financial assistance include the National Association of Area Agencies on Aging and Habitat for Humanity.

I also think you should reconsider a short sale, and see if your in-laws’ mortgage servicer would agree to a reduced amount to pay off the mortgage. Servicers can still go after your in-laws for the remaining balance on the loan post-sale — though that depends on the state — but as I said, that’s also true of foreclosures.

“Another option may be a ‘deed in lieu of foreclosure,’ whereby they would surrender the house to the bank without going through the foreclosure process, perhaps in return for the bank’s promise to waive any deficiency,” said Eric Dunn, director of litigation at the National Housing Law Project.

A short sale or a deed in lieu would impact your in-laws’ credit, but it would still be less severe than the hit they’d take from a foreclosure. And with either option, you need the servicer to agree.

They could also always see if the lender would be willing to forgive them a portion of the principal balance of the loan. It’s unlikely, but the lender may be willing to be flexible — foreclosures are expensive for mortgage companies, after all.

Before your family makes any decisions, I highly recommend discussing your case with a real-estate attorney or a HUD-certified housing counselor. Those individuals could help negotiate the best-possible solution with your in-laws’ lender to ensure they emerge out of this situation in better shape. I wish your family the best of luck.

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