If you needed any evidence that the ‘global financial crisis’ – on a global macro level – and problems with the US real-estate market – on a global micro level – are still affecting people in the their day to day lives, you need read no further than Rischa in Seattle’s comment [AJC: I’ve added punctuation for your reading pleasure]:
From what I’ve read I think we’re screwed, but I’m not even sure what we can do. Here is the scenario: my husband and I bought this house about 10 years ago in the boom here; with both of us working we could afford the mortgage and our lifestyle easily. I’ve [since] been laid off and we’ve been living on my savings, which is now gone and I’m on unemployment, which is fast running out.
We’re about $100K upside down, we got a trad. loan 30 yr fixed, but without 2 incomes we’re sinking fast. We don’t necessarily want to stay in this house, in fact we want to move to a part of the country where the cost of living is less.
Any clues? What should we do? How do we get out of this when getting out would cost more than we have, even if we spent our retirement to get out? We would have less than nothing left!
Of course, it’s difficult to give Rischa personal advice – and, I wouldn’t do it – but, I could suggest that she go back to that post and reread the bit where I said:
Ask yourself the following TWO questions:
i) Can I afford the payments? If so,
ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?
If the answer to both questions is YES, then stay. If the answer to either question is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).
In Rischa’s case, the answer to the first question appears to be NO … and, she would prefer to be moving to a cheaper part of the country (and, cheaper house?), anyway …
So, it’s obvious that she can’t afford her existing house, but what would you do? Hang on to a losing proposition? Or, cut your losses?
I’m not sure if there is a “right” answer to this sort of problem.
Normally, if I lacked the means to meet the mortgage payments and saw little prospect of recovering, I would sell and take the loss.
However, a few thoughts:
1. will the lender agree to a compromise on the debt obligation? The compromise could either be extending the term of the loan (which should have about 20 years left) or even going interest only. This will reduce the monthly payments. She would probably have to demonstrate the ability to service the reduced amount of debt before they would agree to this. (She could ask the bank to forgive some of the debt but I would not hold out much hope.)
2. if the house must be sold, she should initiate the process before the bank does. Mortgagee sales (foreclosures) tend to be at lower prices than sales by owners. An agreement with the bank on the bottom price and forgiveness of all or part of the shortfall would be a prerequisite here – this would also impact credit score
3. I assume that she has looked at renting the property out after they move states and that the rent would not cover the (rescheduled) mortgage payments and other outgoings
4. some states allow borrowers to walk away from their homes without liability for any shortfall. Leaving aside the moral issue here, this would have an impact on future credit applications and the cost of future borrowings
5. decleare bankruptcy – not to be done lightly
First, you have to cut your losses if you want to hold onto your current good credit rating. Second, is more of a question than suggestion.
Is there Family in a cheaper area where they can split rents or something to help out in this time,until things get better for them?
Did you refinance and take equity out? I bet she did since there is no way you are $100k in the hole if you purchased 10 years ago unless you live in Detroit or Gary, IN. Inflation alone would not allow this. She pulled money out and spent it.
I live in the Seattle area. In my neighborhood, houses are about at where they were 3 years ago, and well above the amount of 10 years ago.
I agree with Brad, they either refinanced and took money out, had an interest only loan, or were overcommited on what their mortgage was. Maybe they are in the hole based on what they house valued at the high point of the market.
Unfortunately, if you are having trouble with the mortgage, renting it out won’t help. Rents are low relative to house prices in the Puget Sound. And gets much lower as you move into the surrounding regions.
Tough decisions. I wish them luck.
I’m with Brad on this one…
This is the an example of the typical American who is quick to not take responsibility for his/her actions.
Statements like “my husband and I bought this house about 10 years ago in the boom here (sheeple purchase); with both of us working we could afford the mortgage (over extended) and our lifestyle easily.”
lifestyle = spending to much.
“Any clues? What should we do?” What insanity – Do you take any responsibility for your actions?
It’s becoming a bloodbath out there. Personally, in the past 5 years the only thing we have done is pay off our bills and save money. Now we are sitting on a wad of cash and ready to buy.
“Be fearful when others are greedy. Be greedy when others are fearful” by Buffet
saludos,
Luis
I know she said she had been laid off but I didn’t hear anything about working another job or two. While I agree with what others have said I also believe that tough times call for tough decisions like changing what you do for a living if necessary.
Good luck.
Luis,and a few others here . I know its very easy to cast stones here, when you read stuff like this. But what ever choices she has made in the past , are in the past, and she is now asking for concrete help on things she can do to make things better. So, all this talk I am hearing is not aimed at helping, and last I knew, this site was set up to help each other do a better job of managing our finances.So, please keep that in mind when making comments huh?
The point about taking out equity is important. if she did, and spent it, then that was her “profit” on the investment. she should not expect the bank or the government to forgive her load because she spent the profit already.
The reason this is most likely what happened, is that you would be hard-pressed to find a real estate investment in the US that has lost money over 10 years. Inflation alone would have made you a profit in 10 years time.
as for my constructive advice to others: don’t take out equity and spend it.
@ Brad – … and, great advice it is! Equity is for growth … only spend a portion of the net income that it produces 🙂
Seems like taking out a HELOC is likely what sunk her.
In the interim if she wants to stay in the house can she take in a renter?
That and both look for any income available.
-Mike