Ditching your mortgage? The financial fallout
- April 6, 2010
- 1 comments
- Posted in Latest Posts, Real Estate
Say that your house is way underwater. Say that you can pay your mortgage but are sick of throwing good money after bad. Say that you’ve decided to walk away. Say that your credit rating has always been good. What happens?
That depends on the state you live in and what kind of loan you have—a recourse loan or a non-recourse loan.
With a non-recourse loan, nothing happens—at least, not with the bank. “Non-recourse” means that the bank can have either the house or what’s left of your mortgage loan, but not both. You can turn over the key and walk away, free and clear. Your mortgage contract allows it. The bank can’t come after you to collect the rest of the money owed. Many states require lenders to give non-recourse mortgages when you first buy the house.
Your credit rating will take a hit. But as long as you pay all your bills on time, both before and after the default, your walk-away will become less important after a couple of years. Real estate expert Jack Reed says that, arguably, this is the best possible time to default because so many people are doing it. To future lenders, you’re not a deadbeat, you’re a person with a good credit record hit by a national catastrophe.
In the Texas oil recession of the 1980s, Jack deeded two apartment buildings back to the bank. After that, he wanted to refinance his house. The best lender in town wouldn’t consider him, but the second-best lender took him on, charging an extra one-quarter of a percent. Two years later, he refinanced with the best lender. At that point, no one cared what had gone before.
One little hitch: the federal government cares. Don’t walk away if your child is in his or her mid-teens and you’re counting on a large, low-cost federal PLUS loan (at 7.9 percent) to pay tuition. Your student will still be able to borrow through the Stafford program, but a mortgage default blocks you from getting a PLUS loan for the next five years. You’ll be thrown on the tender mercies of private lenders, who will stick it to you.
With a recourse loan, the scene shifts. You will owe the full amount of the mortgage, even if you deed the house back to the bank. The lender can sell the house for less than the mortgage amount and come after you for all the rest, plus high fees. Refinancings and home-equity loans are almost always recourse loans. That’s true even in states that require non-recourse loans when you first buy.
Lenders might not pursue someone who’s broke. But if they think you have the money, a collection case is entirely possible. Talk to a real estate lawyer before making a walk-away decision, and show him or her your mortgage contracts. Monsters might lie under every clause.
Tags: mortgage, mortgage default, non-recourse loans, recourse loans
Thank you Jain for your open mind conversation.
There are numerous criteria that determine eligibility for these loans which include among others the credit rating of the business owner and also the long term projections for the organization in terms of profitability and revenue. These loans invariably carry high interest rates than Residential or Apartment Building Mortgage.