Walking Away? This questions seems to be on every homeowner’s mind these days. Especially in hard hit areas where values have dropped over 40% over that 2 years. There are many proponent and critics of this strategy. Here is why.
One side says it’ll take years to get the appreciation back to make the home worth the investment, others say there are credit, ethical, and moral issues. So which one is best for you and your situation? Unfortunately, that’s a decision you will ultimately have to decide for yourself after looking at the facts.
Recently, a college professor said that over leveraged homeowners are better off by walking away from their houses – his reasoning is simple. A family has better use for the money they are throwing away on an upside down house. That money can be used for retirement, college savings, travel, or investments
There are websites online like payorgo.com that give you a glimpse to see if it’s better to financially walk away. Other services, such as Walk Away, give you guidance on the best way to walk away from your property and they will keep you inform how long you have to live in the house rent free.
The problem with walking away is it can cause a long term credit hardship that is unnecessary. A foreclosure will affect your credit 7-10 years. You will be obligated to disclose in future loans you have a foreclosure. You also will not be able to apply for a Fannie or Freddie MAC loan for 5 years.
So what is the answer. A hybrid solution is best, one where you walk away by selling the house as a short sale. A short sale is when you lender will accept a reduced payoff to release you from your mortgage. The bank will forgive the homeowner for the amount over the purchase price. Once the property is release the house can be sold to another buyer. The short sale has two main benefits. One it’s not a foreclosure, you can restore your credit in about 2 years if you keep all your other accounts current. Two, you will feel a lot better about yourself, because morally and ethically you did your best to help the bank recover some of their money back.
Now there are some items you need to be aware of when selling a house as a short sale.
- The bank may not approve it, if they believe their is no hardship.
- Also, if the house is not your primary residence you may have to pay taxes on the amount forgiven. These tax implications can be easily addressed by consulting your tax accountant.
- In some cases, the bank may also want a promissory note for a percentage of the amount that was forgiven to release the note. The promissory note can be address during the negotiations with the bank, so it is reduced or completely eliminated.
Even with those minor bumps in the road – compared to just walking away and letting a property go into foreclosure, a short sale is many time better for your financial and credit future. Financially a short sale will allow you to re-establish your credit much faster.
If you have questions about walking away or if a short sale is right for you. Please give us a call. We will provide you with straight answers and let you choose what solution is best for you. CALL US TODAY! Our number is 1-877-USELL-IT.
Note: This post in no shape or form advocates walking away from your property. If you decide to walk away, you should seek legal and tax advice. Our goal is to show you how a short sale may benefit you vs foreclosure.