Embattled real estate markets and soaring foreclosures aren’t just affecting middle-aged Americans; there are plenty of young people who bought early at the wrong time. True, young homeowners have less invested in a home and plenty of time to rebuild their finances, but finding yourself staring down the barrel of foreclosure is unpleasant at any age. I want to share an email I received from one such homeowner, and ask: What do you recommend he and other upside-down homeowners do?
A 26-year old reader from Florida wrote me and said:
I bought a home at the peak of the market three years ago and am now nearly 50% upside down. To make matters worse, I live in Florida where our real estate markets are being hit extremely hard. Since the banks are being “stingy” with refinancing loans and I don’t qualify for Obama’s plan, I’m convinced that a planned foreclosure or short-sale are my only options. Obviously, I’ll ruin my perfect credit that I’ve been building for nine years.
The mortgage is less than 31% of my gross monthly income, I am not behind on payments, but I am still young enough to rent for the next five years before I consider buying another place in a better market.
What are your thoughts? This reader is fortunate enough to be able to keep making payments; the question is: Does it even make sense? I’m not so sure. Even if the Florida real estate market rebounds, it will take a long time for it to rebound enough so that he could sell the home without taking a loss.
Should he walk away? Money ran an article in its May issue asking: “Is it ever a good idea to ‘walk away’ from a mortgage”? The answer is a surprising “maybe”. Yes, your FICO score will drop 100 points or more, and the foreclosure will stay on your credit report for seven years. It will probably be at least that long before you could buy again. And although your credit report may come into play with landlords and prospective employers, a lot of people are going to be more sympathetic about your situation now that we are, as Money put it, “Foreclosure Nation”.
What about taxes? Once upon a time, there were tax consequences to walking away from a home: Uncle Sam would tax you on the unpaid mortgage balance as if it were income. Those taxes have been repealed as long as the property is your primary residence (walk away from an investment property, and you’ll still owe).
Is it ethical? Of course, there is also the ethical dilemma of whether it is OK to walk away from a home. That one, however, is purely personal. I imagine that for everyone who says it’s absolutely not okay ethically to walk away from a debt, there are others who can aptly argue that the banks took these risks and are now simply paying the price.
What would you recommend? Do you think this reader should stay put and suck up the sunk value of his home, try to short-sell, or just walk away? Let us know in a comment.