Should I foreclose on my house?

June 25, 2007 9:26 AM

I have a crappy house that is falling apart and keeping me from moving on with my life. Should I foreclose on my house?

I am in a bad position in life, and would appreciate any input from the MeFi crowd.

2 and a half years ago, when I was 25, I purchased a house on an FHA loan. At the time, I thought buying a house was the right thing to do, and I thought I was getting the right house. I thought wrong.

As it turns out, the house has been a maintenance nightmare. It was gut rehabbed by the previous owner, poorly. (In fact, by buying it I think I got scammed a little.)

Plumbing problems, leaky roof(s), faulty gutters, broken windows, and a dilapidated garage seem to never stop. We tore out a bathroom and discovered unrealized structural damage (a previous infestation of termites). And, I've been robbed.

The house is in an urban neighborhood that I thought was safe and quiet but seems to be getting worse. The housing market here has plateaued, and my house has suffered since I bought it, making me think it is probably worth less than when I bought it.

And, I have realized, even if it was all fixed up, it would still be a crappy house. It has a poor floor-plan and is not the most "livable".

I bought it for $79k, I owe $76k.

Now I just want out. This thing is sucking the life and energy out of me and I want to move on with my life. I am 28 and have opportunities that this is holding me back from.

To sell it, I need to fix it up - or at least the egregious issues. I estimate I would need $3000 - $5000 for this. I don't have any savings, basically.

Even if I put that money into it, I still have to sell the place to someone. When I bought it, it was on the market for over 4 months. It costs about $800/month to keep. So this is potentially another $3000+ to pump into it.

But if I could just get rid of it - foreclosure? I know my credit would be screwed up but I could move on with my life. I could take that $3-5k and invest it, and maybe by the time I was 35 I would have some savings and good credit again.

Should I consider foreclosing? I had a bankruptcy before and got past it, I think I can do it again.

But I do want to go to graduate school (would need student loans), and to get a car loan at some point.

(Note: I have moved out of the house, have free rent at my parents. Just trying to get rid of it at this point. But I do need to get out of Mom's _sometime_.)

Any advice for someone who bought a lemon?

thanks Mefi!!!

posted by simpleperson to home & garden (25 comments total)

Before I answer, where is the house? What is the neighborhood like? Are houses in the neighborhood in similar circumstances of disrepair?
posted by parmanparman at 9:28 AM on June 25, 2007

If you have moved out of the house, could you just rent it out? If you bought at 7.3% interest with no money down on a 25-year amortization, I'd estimate you have almost $4,000 in equity. How much could you rent it out for? I'm just plugging in numbers for you, but I'd guess you're paying around $700 after mortgage and property taxes. I don't know what downpayment, amortization or interest rate you have. But I wonder if you could rent it out and use the money to make some repairs. Or at least buy yourself some time to get on your feet.
posted by acoutu at 9:36 AM on June 25, 2007

Don't foreclose - there are too many of those already, and your neighbors will not be pleased when they go to sell their houses.

2nding renting it out. You may even get lucky (like my landlord did) and rent to handyman/construction worker types who will be motivated to fix it up properly and make it livable.

Good luck.
posted by Carnage Asada at 9:43 AM on June 25, 2007

I think I'm in a very similar situation (same age, same dilemma, same kind of FHA fix'er upper scam directed at the un-educated homebuyer), but will wait before commenting too since parmanparman's question about houses nearby seems to be a good one in determining where you should go next.

When it comes down to it, I think the property value of the land itself plays a part in what you can do. I'll keep a close eye on this question. If it matches my situation moreso I might have some advice. Other than that though I'd suggest consulting with your mortgage company too....banks generally hate to forclose and can be surprisingly helpful if given the chance.
posted by samsara at 9:49 AM on June 25, 2007

Oh, I see that it's $800 a month to keep. Could you rent it out for that? Even if you could only rent it out for $650, you'd be covering the interest and you could think of the equity you're accumulating as savings.
posted by acoutu at 9:50 AM on June 25, 2007

I'm in a similar situation and recently made this post that might help you.

http://ask.metafilter.com/64179/How-to-rent-a-house
posted by Octoparrot at 9:52 AM on June 25, 2007

Google We+Buy+Ugly+Houses. These quick cash homevestor companies are bottom-feeders like the PayDay Loan offices, but selling for cheap is still better than foreclosure. (I think renting it out is your best option; just throwing out slightly less worse alternative to foreclosing.)
posted by junkbox at 9:58 AM on June 25, 2007

You're 27 and you're considering having both a bankruptcy AND a foreclosure on your record? Just keep on living at home until you save up the 5K, make the repairs, and sell it.
posted by footnote at 10:06 AM on June 25, 2007

I think the idea of renting it to someone that is handy at a discount in exchange for repairs is a great idea.
posted by sulaine at 10:06 AM on June 25, 2007 [1 favorite has favorites]

If you foreclose, the bank will come after you for any money they lost on it. Your nightmare is only beginning at that point.
posted by AaRdVarK at 10:09 AM on June 25, 2007

BTW FHA isn't some scam system... it's just a type of loan that meet gov't standards to be insured by the gov't. Just because you bought a house using an FHA insured loan has nothing to do with the house you selected. I don't understand the scam. There aren't a bunch of FHA guys out there scamming uneducated buyers.

@Aardvark - maybe, maybe not - it's an FHA insured loan, so the bank gets all their money either way. Simple person paid the insurance premium for that at closing and every month.
posted by thilmony at 10:18 AM on June 25, 2007

Would you consider suing the seller? As thilmony notes, FHA isn't a scam and selling to an FHA customer doesn't excuse selling an unlivable dump if misrepresentations (including silent ones) were made.
posted by rkent at 10:27 AM on June 25, 2007

Yes, I would look into suing as well. If it was an FHA loan, it should've had an inspection before you could even get the loan and major structural damage is definitely not OK for an FHA loan.
posted by atomly at 11:15 AM on June 25, 2007

Making the repairs and selling it sounds like the optimal solution, but from the way you described the area, would it sell? I rented a house in a nicer area of Detroit for seven years, and only paid $450/month for a house that would've fetched upwards of $800 in any other city. Even though our subdivision was well-kept, had its own very active neighborhood CB safety patrol and very little Armorguard on the local doors/windows, it was still within the city limits and just the word "Detroit" knocked down real estate value by several thousand dollars. The same may hold true for the neighborhood your house is in.

In my case, even though the house was basically nice, it was older, and eventually the landlord stopped taking care of the necessary repairs. He owned four houses on our street, and was having trouble keeping tenants. The windows in our house were weather-rotted and insulation was non-existant (our heating/cooling bills were horrendous). His attitude became, "If you don't like it, move."

If you do decide to rent, then you'll still be responsible for all the repairs, so you haven't really escaped that part of your financial commitment. Will you be able to charge enough rent to make up for that cost? See above. If the neighborhood is as sketchy as you inferred, the type of tenants you attract may be iffy, as well. Can you count on them to pay rent regularly? Once they assume residence, they have the upper hand, so to speak, and it will cost you a lot of time and money if you have to evict them.

If one of those We Buy Ugly Houses places offers you a good price, I'd say go for that option. Mr. Adams and I have since moved to the 'burbs, and the last time we drove through the old neighborhood, our former house and the one next door were sitting empty, abandoned, windows and doors boarded up.
posted by Oriole Adams at 11:37 AM on June 25, 2007

BTW FHA isn't some scam system

Just to side note that, what I meant when I put the word scam in the same sentance as FHA, is that these low cost poorly renovated houses still often meet the minimum criteria for an FHA loan.

I've been through this as well...I would think that the submitter has too, but I'm wondering if he could expand on it. In order to get a FHA loan you have to go through more thorough inspections for it to be FHA approved. Did you hire your own inspector? In MD, where I live now I had to by law.

The scam really is coming from the seller as noted. Depending on the quality of the inspector hired, he may have missed the glaring issues as the seller did such a good job covering it up. (otherwise the bad roof, structural damage from the crawl-space, etc would've shown up on the report).

It just seems to me that something in the FHA loan process the submitter went through was left out or poorly handled, which should give him good leverage. But once again, forclosure is not the best answer...there's advice and possible solutions you can get to by talking with your mortgage lender....they don't like to reclaim houses.
posted by samsara at 11:42 AM on June 25, 2007

(also to add, renting isn't an option for FHA loans in MD for the first 4 years. I think this is mostly the case due to qualifying buyers getting the loan and turning them into rentals under a low fixed APR mortgage, which is what FHA was not designed for.)
posted by samsara at 11:47 AM on June 25, 2007

How many bedrooms does the house have? If you put locks on the bedroom doors, you could rent the place to "tenants" and basically give them the run of the house. Just keep one room to yourself for your primary residence. Would that work, just long enough to let you save up for repairs?
posted by acoutu at 12:17 PM on June 25, 2007

I think you have a responsibilty to yourself to fulfil your obligation you made when you signed for that loan. Get your hands dirty and see how you can improv the house into a condition that will allow it to sell.

Also, seek guidance from a local real estate agent as to the possibility of selling it now as a fix-r-upper. Have a professional tell you what its worth, what its REALLY worth, not what you want to get out of it and then go from there.

I dont think there is a chance in hell to get grad school loans ontop of a credit report that shows bankruptcy & foreclosure.

Good luck!
posted by crewshell at 12:21 PM on June 25, 2007

I'm not a homeowner, but my understanding is that foreclosure is Bad and Something To Be Avoided (at least per my mortgage-banker sister, who could be biased.)

You do have other options besides foreclosure. You should contact your lender and see what they say. Depending on your circumstances you may be able to work a Deed-In-Lieu or a Short Sale to get the property off of your hands without a foreclosure going on your credit report.

This message board seems to have a bunch of folks knowledgeable in the ways of foreclosure.
posted by EmptyK at 12:24 PM on June 25, 2007

Thank you very much for the input everybody, I really appreciate the advice.

To answer some questions -

- it is in a working class neighborhood in a midwestern city, traditionally a quiet part of town but some bad apples and changing demohraphics now

- there are multiple properties in the area that are for sale but have not sold

- Renting would be difficult. The maintenance - and costs - would need to come first. But thanks, I will contemplate

- the scam wasn't the FHA, the scam was that the rehabber did just enough to make it look kind of pretty with major problems lurking beneath the surface. I don't think I can sue him - it's years later now, and it was bought as a fixer-upper (we got a few repairs from him before sale, but not much). I didn't look close enough/didn't know what the hell I was doing

- I guess I should mention, it's an 1890's working class house. Maybe I shoulda seen this all comin

Thank you again. I try to be a good person I just got myself in way deep here.
posted by simpleperson at 1:05 PM on June 25, 2007

I don't think you're in too deep, essentially you owe the bank more than the asset is worth. Save yourself the headaches and sell it for whatever you can get for it. Pay off the remaining balance to the bank over time. You'll at least save the cost and hassle of ongoing repairs, utilities and taxes.

Worse case, you owe the bank 10 or 20 grand and I'm sure they'll give you decent loan terms since you aren't trying to stiff them out of the money.
posted by hilby at 1:54 PM on June 25, 2007

Are the repairs so bad that the house is unliveable? Let's say you live with your parents and rent out the entire house for $400 a month. You can let go of some of the headaches and now it's only costing you $400 a month. Of that, a portion is going to equity. Surely you could make a case for doing this for under a year -- I don't know the FHA, but they must make some allowances for people who've run into financial problems. If it's now only costing $400 a month, you could save up $4800 over the course of a year. You could use that money to make some repairs. And you would have a little more equity than you do now -- enough to offset the cost of selling the house.

I'm not trying to push renting on you -- it's just that I wonder if you could find some way to delay all this for a few more months, just so you can get back on your feet and make a less panicked decision. (I have also owned a terrible home that gave us headaches. We waited two years and then bailed, but not before fixing what we needed to do to sell it.)
posted by acoutu at 3:45 PM on June 25, 2007

Worse case, you owe the bank 10 or 20 grand and I'm sure they'll give you decent loan terms since you aren't trying to stiff them out of the money.

If only banks thought like that... They dont give a flying rats tail why your getting the loan, at least not anymore. Maybe a credit union would work on a personal basis but big corp money hunds? BAH!

I admire your faith in the system though :)
posted by crewshell at 4:39 PM on June 25, 2007

Contact your mortgage company and ask what programs they have for people with difficulty paying. If you're using a big lender, then they'll have something. The trick is to contact them before you go into default. Once you're in default/foreclose their incentive to work with you is diminished. Also, your credit is trashed once foreclosure starts, so you have zero options in terms of restructuring the loan. Now they would probably switch you to an interest only loan. Interest only loans are almost always a terrible idea, but since you're going to sell immediately it may be okay.

Next, polish the house as best you can as cheaply as you can. There must have been some reason that the house appealed to you. Showcase whatever that was to potential buyers. Then - and this is most important - price it aggressively. You'll have the most buyer traffic in the first 10 days. Price it aggressively immediately. Also, since your starting at an aggressive price you should ask your realtor to accept a smaller commission if it sells in 30 days.

Good luck!
posted by 26.2 at 7:55 PM on June 25, 2007

thank you again everybody! this was very helpful.
posted by simpleperson at 5:24 PM on June 26, 2007