I have spoken with many people who have the unfortunate circumstance of having negative equity in their home. Then people start looking around at the kind of house they could be living in for the same payment if they could get out from under the house that they’re in. The thought creeps in to their mind (and maybe it’s floated through yours): would I be better off to just turn in the keys to the bank? Why do I keep making a payment when it’s going to be many years until I’ve got positive equity? Am I just throwing good money after bad?
When you are looking at selling your home and you’re in a negative equity situation you have 3 options:
1) Sell the home and pay the difference out of your savings.
2) Sell the home and ask the bank to forgive the balance that the sales proceeds don’t cover (a short sale).
3) Just stop paying and live there until the bank tells you that you can’t anymore (foreclosure).
Each of these is a blog post of it’s own, but today I wanted to talk about why you probably wouldn’t want to go with choice 3.
There’s a few different bad things that happen when this route is pursued:
1) This has a negative impact on all of those around you. It is estimated that a foreclosure in a neighborhood reduces everyone’s value 5-15%.
2) This trashes your credit score. If your plan is to go buy another home you can forget about that for about 7 years.
3) There is a good chance that the bank will pursue you for a deficiency. The difference between what the bank sells the home for and what you owe is something that they can pursue you for. I have seen banks being more aggressive on this lately so this isn’t something to scoff at. If you sell the home via short sale because you have an actual hardship they’ll often waive their right to pursue for deficiency and if they don’t the amount that you get for the house is most likely going to be much higher than the bank gets so the deficiency amount is lessened.
Just simply walking away is never a good idea. There are always options that should be exhausted before a foreclosure is something in your life. If you’re thinking about this, please call me first. There’s a better way!
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