Selling an underwater house?
December 21, 2009 6:15 PM   Subscribe

Previously I was considering bankruptcy, but now I'm considering selling my house. My fiancee has left, I have $50k in CC debt, student loans, and a mortgage that is under water by $15-25K. Renting it out will only cover 2/3 of the mortgage/taxes/ins., and nowhere to live. I'm thinking about selling it, but what happens if I sell for less than I owe? Also, I'd be responsible for the realtor's fee (4-6%= appx. $20-25K). Add those together, and it's 30k to 50k to SELL my house and get out from under the mortgage. What happens to the balance that I would owe? Thanks!
posted by antipode12 to Work & Money (25 answers total) 1 user marked this as a favorite
You can't just do this. The bank would have to approve it, which can take a lot of time and will turn off a high percentage of buyers from even making an offer. (I live on a small fragment of my earnings and am looking to buy a place in America. I found a great deal on the ideal place, but like what you're talking about, it was a short sale and subject to the bank's approval. I didn't even consider it.) Bankruptcy may still be a better option, what with that much debt, but before you'd go there I'd seriously work on how to not get into the same situation again.
posted by Dee Xtrovert at 6:23 PM on December 21, 2009

Dee Xtrovert is right. If you have a $125k mortgage, you can't just list your house for $100k and then expect to make it all the way through closing unless you do one of two things: Have a bank approval for a short sale or you bring the difference in a cashier's check to closing.

The standard Metafilter verbiage applies in that I am not a lawyer, real estate professional, tax adviser or someone other than an anonymous set of bits on the Internet.

If you have a house on which you are underwater and are behind on payments for it and the bank refuses to modify your loan, you have three choices:

1) Go bankrupt. You will then pay back the back payments (the arrears) under the terms of a bankruptcy plan spread over 3-5 years. You must have a plan for paying on any of the secured debt you wish to keep (i.e. house, cars, anything where the loan to buy the thing is backed by the thing) and it must be "reasonable" in the eyes of the bankruptcy court. However, payments to your mortgage company must begin immediately for the regular monthly amount.

2) Short sale. The bank may allow you to sell the house for less than you owe and it will work out the difference with you. Sometimes this means the bank eats the loss, collects on insurance you may have been paying for, or agrees to let you pay the balance as an unsecured loan. As previously mentioned, this approval process is neither guaranteed or quick. In fact, some banks are considering a short sale not worth the hassle. You must consult a real estate professional--preferably someone who specializes in these sorts of transactions--to make it work.

3) "Jingle mail." So named because you simply mail the keys to the house to the bank and leave it to them to figure out. Hazardous because the bank may take its own sweet time either foreclosing or actually taking possession, which leaves you on the hook to your city/county/state/water district/school district for taxes and property upkeep. Simple because you "simply" walk away. Not the best option, but lots of people are doing this if the first two fail.
posted by fireoyster at 6:34 PM on December 21, 2009

Short sales can be tricky; as Dee Xtrovert said, the bank has to approve it, as the bank is essentially agreeing to take less than the mortgage balance as settlement of the debt. That's what happens to the balance--the bank agrees to write it off.

One friend of mine ended up in a long, complicated mess while trying to buy a house on a short sale, and even after moving into the house were at risk of having to move out again if things fell through. It was a big stressful mess for them. So, yes, buyers may be wary of a short sale.

On the other hand, another friend was able to convince her bank to approve a short sale by just not paying the mortgage for a couple of months--the bank preferred the short sale to foreclosure. in her case, she knew it was risky, but she and her partner owned another house, which they were living in, and felt the potential damage to her credit rating was worth the risk. The house sold quickly once they were able to lower the price. An investor bought it to use as a rental, I think, rather than an individual or family that wanted to live in it.
posted by not that girl at 6:36 PM on December 21, 2009

I'm by no means well-versed in short sales, but I'm under the impression that there are tax consequences with them. I could be very very wrong, but it's my understanding that if you sell a $300,000 for $200,000, you're liable for taxes on that $100,000 of "forgiven" debt. Please please please check with your own tax adviser. Or look at this article. My point is: Check on the tax consequences of doing this.
posted by jdroth at 6:41 PM on December 21, 2009

Look man, it's time to consider bankruptcy. Fifty thousand dollars in credit card loans?!? That's insane! The interest alone must be in excess of ten thousand a year. I don't know how much you make, but the only way to manage that kind of debt load is to make one hell of a lot more than I do.

You can't get the student loans to go away in bankruptcy, but you can probably whack a good chunk of the credit card debt, the house, and the rest of it. This is going to screw over your credit score, but let's be honest here: no one in their right mind is going to lend you money anyways.

Call a bankruptcy lawyer, stat. Seriously. Like, last week.
posted by valkyryn at 6:55 PM on December 21, 2009 [1 favorite]

Okay, saw your previous question. I say again, it is time to declare bankruptcy. It's going to screw your credit score for seven years, but again, you weren't going to be able to borrow any money in the next seven years anyways. At least this way you get out from under this mess.

Bankruptcy lawyer. Now.
posted by valkyryn at 7:03 PM on December 21, 2009

Have anything socked away in a 401k? Don't touch it! Don't pay your CC debt with it! Don't pay your mortgage with it! Retirement savings are about the only thing that can't be taken away in a bankruptcy.
posted by fatllama at 7:09 PM on December 21, 2009

I really have no idea, but can you just walk away? I've heard many home loans are non-recourse, i.e., you stop paying your mortgage and the bank takes the house and you're done. Is this the case with you? There was an article in the WSJ a few days ago about so-called "Strategic Defaulting". It was interesting to me, but I don't know how broadly applicable.

I have no idea if this is a good idea -- it's just one you didn't mention in your post.
posted by losvedir at 7:32 PM on December 21, 2009

I'm not too worried about the CC debt, because without the house, I'll be able to pay it down over a few years.

I guess my core question is about the Realtor: how does she get paid if I go short sale?

Also, how damaging REALLY is short sale v. foreclosure?
posted by antipode12 at 7:53 PM on December 21, 2009

This previous answer may help, as it lays out the difference between a short sale and a DIL. Strategic defaulting is very un-strategic if the lender chooses to go after you, which they may well.

Really, you need professional advice. You can ask MetaFilter all you like, but the exact nature of your debts, the rates, the flexibility of the lenders, your particular tax situation, etc. mean that you need someone who's job it is to help you. That person is a financial planner or a bankruptcy attorney.

And as far as I know, you are still the seller, so you still pay the Realtor on a short; not sure about the DIL, now that you mention it.
posted by DarlingBri at 8:26 PM on December 21, 2009

I'm not too worried about the CC debt, because without the house, I'll be able to pay it down over a few years.

I guess my core question is about the Realtor: how does she get paid if I go short sale?

Also, how damaging REALLY is short sale v. foreclosure?

From what I can tell, your logic is really off on all this.

A short sale will tank your credit as completely as a foreclosure or bankruptcy. How does the realtor get paid? Well, if you have a house worth $200K, but can only sell it for $150K, your realtor's commission is based on the $150K sale price. If commision is 6%, that's an extra $9K the bank is losing. So instead of losing $50K, they're losing $59K. This, of course, makes the whole thing a lot less attractive to the bank. They're going to want to look at your financial situation before deciding whether to approve a short sale or not, and they will - as I would - wonder why you wouldn't have already declared bankruptcy since (as you say) you could afford the credit card bills without the house, then you presumably could afford the house without the credit card bills.

Additionally, not many people with debt as unmanageable as yours ever do pay off their credit card bills (from what I know anecdotally) - eventually, huge debt tends to lead to bankruptcy anyhow. Your questions lead me to believe you're pretty much in the dark when it comes to basic financial knowledge, and - no offense - but from the scant information I have, I wouldn't bet on your having changed whatever behaviors which led to the debt in the first place.

Look at it this way. You could:

1) Go for the short sale and ultimately pay off your credit cards. The chances of a bank approving a short sale may be slim. You may also never break the credit habit and never pay down those bills. But even if you do, your credit is tanked and you end up with nothing. This scenario has no real advantage that I can see, and has the disadvantage of being unpredictable for many months. I'd bet that it wouldn't work and you'd end up foreclosing or declaring bankruptcy ultimately anyhow. Only you'd live with months and months of stress before it came to that. And for the record, there's not much honor in paying off one bank's credit card and fucking another bank on your mortgage if that's what you're thinking. Must as well go for broke on this one - no pun intended.

2) Declare bankruptcy and keep the house. Your credit would be tanked here too, but at least you'd have the house. This is, from what I can discern, the most controllable scenario.

3) Declare bankruptcy *and* simply walk away from the house. Your credit is tanked here too, but no worse than in other scenarios, and - if you're smart - you can start putting away the money you would have spent on an underwater house or credit card bills.

Your scenario, number 1, makes the least amount of sense to me. I'd love to know why you'd consider it. Just to make it clear, *all* of your options will ruin your credit. So it makes simple sense to do what will serve you best in the years it takes for your credit history to not be affected by any of these actions.
posted by Dee Xtrovert at 9:27 PM on December 21, 2009 [2 favorites]

I can't speak to the house situation, but I think you are really underestimating the credit card debt.

I'm socking away half of my salary to pay off the last of 22k in credit card debt. I started almost exactly one year ago, and have approximately 4 more months before it's all paid off. I had to cut out a lot of stuff - no cable, only work cell phone, no new electronics, my t.v. is 12 years old, my dvd player is 6 years old, etc. I'm holding onto my fully paid off car for an extra 2 years so as not to take on new debt.

I made a choice to do this, so I could get out from under all that stupid c/c debt. The interest was killing me.

Unless you're bringing in major revenue, it will take concentrated effort and sacrifice to pay off that credit card debt. And you have other major debt that I don't have to worry about.

You should consult a bankruptcy lawyer, ASAP.
posted by lootie777 at 9:50 PM on December 21, 2009 [1 favorite]

Depending on how the short sale is conducted, it can affect your credit in different ways. If the bank writes off the balance of your loan less the sale price, then your credit would not be affected — however, you'd have to pay income tax on the written-off amount, which might be unpleasant. If the short sale also involves a foreclosure proceeding (where the bank sues you for the difference between the sale price and loan balance and then obtains a deficiency judgment), that will severely impact your credit. This is something you need to work out with your lender well in advance, so it doesn't come as a surprise.

If you do go the short sale route, you want to start working with your lender fairly early, rather than suddenly taking them by surprise. The process can be long, and you probably want a lawyer (or perhaps a very experienced real estate agent, but I'd err on the side of lawyer) to advise you or negotiate on your behalf.

However, I think you are going the wrong way with the short sale. It's fairly insane to short sell a house — which you can live in, and which is probably at a reasonable interest rate — in order to be able to make payments on consumer debt — which doesn't do anything good for you, and is probably at an atrocious interest rate. Plus, it's likely that the house which is $25k underwater today will be in better shape a year from now, if prices recover a little. The same cannot be said for consumer debt.

I agree with others in the thread; you should be talking to a bankruptcy lawyer about getting rid of the CC debt, by bankruptcy if necessary. $50k is worth shooting a hole in your credit in order to eliminate, IMO, given that you already have a house.

Even if you were going to sell the house (because you needed to move or something), I'd still be saying the same thing about the CC debt. It's nice that you want to try and pay it off and everything, but it's irrational. Bankruptcy laws exist so you can get out of holes like the one you're in without being tossed into the street; you should take advantage if you can. Selling a house to pay off credit card debt is a bit mad; it's exactly the sort of Dickensian situation that the modern bankruptcy laws were written to prevent. Why would you volunteer for such a thing?

One thing you absolutely should not do (but the CC company may try to talk you into): do not "restructure" or in any other way package your consumer debt from the credit cards into a home equity loan or second mortgage. You want to keep that consumer debt well away from your house.
posted by Kadin2048 at 12:36 AM on December 22, 2009

You really aren't grasping the realities of your situation. There are exactly two ways this works out. Either

1) You come up with another $50-75k or more in income, or;

2) Your credit score is f*cked for a few years.

That's it. Those are your options. As the first option doesn't seem particularly feasible, what you're faced with now is a series of choices about how the second option is going to look. It's possible that you could come out of this with a good chunk of that consumer debt gone through a strategic bankruptcy, and it might even be possible to both keep your house and clear out some of that negative equity. Or you could do a short sale, which as pointed out above will wreck your credit in the short term just as completely as a bankruptcy would, and still have the credit card debt to deal with. Given that retiring that debt in five years is going to cost you somewhere in the neighborhood of $38,000 in interest (assuming a 25% rate), for a monthly payment of $1450, deciding to deal with that outside of bankruptcy seems... well... really, really dumb.

I don't understand why you're undecided about this. Declaring bankruptcy is going to be the cheapest, most reliable, and quickest way of getting you out of debt and in a position to borrow again. All the other options aren't significantly better for your credit and are going to cost more in the long run.

Though given your history, I think not borrowing a red cent for the rest of your life might be worth considering.
posted by valkyryn at 1:01 AM on December 22, 2009

You could talk to the mortgage company about a deed in lieu of foreclosure. But I agree that in your circumstances bankruptcy seems like the best option.

Please call a bankruptcy attorney who will be able to walk you through your options.
posted by miss tea at 4:15 AM on December 22, 2009

Unless you make at least $150K a year, 50K in credit card debt is bankruptcy territory, even without the house, as many here are telling you. To get ahead of that much debt at the usurious interest rates you are almost certainly paying would mean making payments of several thousand dollars a month for as long as it will take you to recover from bankruptcy.

You could get a second job, take in a boarder and live in a room or two of the house, cut your expenses to the bare bone, and still not get out of that hole unless you have a seriously high income.
posted by fourcheesemac at 5:07 AM on December 22, 2009

If 4-6% is $25,000, we're talking a $500,000+ mortgage and not a $125,000 mortgage, which would probably explain why you can't rent it for enough to cover the costs. I just wanted to point that out to people who are throwing around numbers. $15,000+/- on a $500,000+ mortgage isn't really all that big of a deal, especially if the OP can pay down 50g's worth of cc debt "in a few years".

Honestly, I would talk to the bank about short sale options and/or see about trying to rent it in the short term while I personally rented a teeny weeny cheapy place, if such a thing exists in your neck of the hood.
posted by TomMelee at 5:45 AM on December 22, 2009

Bankruptcy exists for exactly this situation. Many banks have been pretty shortsighted about working out loans of this sort, but go ask them if they have a department that deals with short sales. If they can't help you in a reasonable time frame, then reconsider bankruptcy. Given how credit has screwed up your finances, going without credit for 7 years is really not so bad. That sounded kind of bitchy, which is unintended. The benefit of bankruptcy might be substantial, weighed against not having good credit for 7 years, it may well be worth it.
posted by theora55 at 8:18 AM on December 22, 2009

Walk away from all of it. Your mortgage and credit card contracts cover this: you agreed to pay principal+interest OR to take the penalties for not doing so. That's why there are interest payments: to cover the people who don't pay things back. So: walk out of the underwater house, and declare bankruptcy. You'll have shit credit for a few years but so? Credit is how you got into this situation. Start living with cash and debit card.

Don't let ethics handed to you by a corporation dictate the next seven years of your life.
posted by seanmpuckett at 9:08 AM on December 22, 2009

OK, maybe I should clarify few things:

1) The mortgage is $400,000. $25000 is the realtor + lawyer + other closing costs.

2) I have a good job, and with my fiancee's income, we were in ok territory, over the long term.

3) Some of you have been very helpful. Thank you for the efforts.

4) Some of you need to drop the sanctimony: I am in trouble because my fiancee and I floated her while she went back to school, got a better job, and spent 1.5 years finding a job. (That's much of the CC debt.) She got a job recently, and we *would've* been digging out in short order. Part of the plan. (I never had any debt prior to all of this.) The only snag was that we split up.

You wanna give me sanctimony? Give to me about my relationship.

5) Fiancee doesn't want to file bankruptcy, which is the hesitation. (Obviously, I don't either.) She's afraid if *I* file, creditors will go after her. (I'm told they will.)

She's in a better position than I am to sell the house short: her parents can lend her half of the mortgage balance. But I have no way of doing the same.

6) My credit card rates avg out to appx 8%.

7) I'm going to be 36 soon. 7 years is a long time.
posted by antipode12 at 12:27 PM on December 22, 2009

***EDIT: #5) Since we are underwater, if we sell the house for less than the mortgage, we would be on the hook for the balance (expecting $25000-40000 or so). Fiancee's parents could lend her half of *that* remainder.
posted by antipode12 at 12:30 PM on December 22, 2009

How do you manage to keep 50K in CC debt at 8 percent? Is that stable, or does it expire?
posted by fourcheesemac at 2:39 PM on December 22, 2009

It's stable. Just a mix of swapping balances to better cards, calling the companies, and pushing them, proving that I am willing to leave them, and good credit. (I guess it's getting worse now.)
posted by antipode12 at 4:39 PM on December 22, 2009

She's in a better position than I am to sell the house short: her parents can lend her half of the mortgage balance. But I have no way of doing the same.

7) I'm going to be 36 soon. 7 years is a long time.

Eight or nine years is longer if the end result after the next year or two is that you have to take drastic action. To me, it sounds like you're betting that you can handle this . . . but "sanctimony" aside, you previously bet you could finance a lifestyle outside of your immediate means, and that didn't work. The reason why it didn't work doesn't matter - the fact is, you took a foolish gamble and you lost. It's worrisome that you can complain about snark but not see this for what it is. Every story of financial disaster has some positive alternative "would've." Don't make the same mistake again.

It's great that you have some sympathy for your ex here, but you don't have a real option. If your story is true and your debt exists due to your support of her, then she can either pony up the full amount of the house debt and work out a plan whereby you repay her, or she can shell out her share of the credit card debt, which may save you - or she can share your fate.

According to what you say, you floated her. Now you're saddled with debt, which as you say, you cannot pay your way out of as she/her parents can. That being the case, you shouldn't care about the pitfalls she may encounter, or her desire not to declare bankruptcy. I'll say it again - it's probably not possible for you to escape ruined credit. Particularly in light of the revelation that her finances will be taken into account as well, since she's on the hook too.
posted by Dee Xtrovert at 6:37 PM on December 22, 2009 [2 favorites]

Even after reading your followup, I don't see how selling the house would be a good option for you.

Selling the house is going to work two ways: either you do a normal sale, in which case you have to bring money to the table in order to pay off the mortgage. You can't do that, because you're already in debt anyway (your ex apparently can, but that doesn't help you). So this is out. But even if you did have that much money sitting around, it wouldn't make sense to use it for this purpose, as opposed to paying down that CC debt.

Incidentally, although I'm impressed that you've managed to keep the CC debt at 8% thus far, I would not bet on being able to do that indefinitely. It is likely (based on Treasury yield spreads) that interest rates will increase over the next few years. This is a good time, IMO, to be sitting on a nice fixed-rate loan, and a bad time to be hauling around an unstable pile of variable-rate debt that might jump to 12 or 15% (or more) if the balance-transfer deals dry up. Also, if you lose your credit rating as a result of a short sale, or if for some other impossible-to-predict reason you take a ding to your rating, those offers will probably stop coming. It's a fairly dangerous thing to bet on being able to do continually.

The other major way to go would be a short sale, or deed in lieu of foreclosure (which is, effectively, a short sale to the bank). Both would more than likely screw up your credit, and at best they would just get rid of the house—meaning you'd now have to rent—and leave you with the CC debt. Short sales are good ways for people who are underwater on a house and absolutely, positively need to get out of the house to "walk away" from it without going through formal foreclosure. (And to get at a related question that you seemed to have, your realtor's fee is paid as a percentage of the sale price, out of the proceeds. So they get 3% of the sale amount, and the buyer's agent generally another 3%, from the sale, before the bank gets to it. You wouldn't pay it out of pocket in any event.) But I don't see it helping you that much.

I can't fathom a situation where either of those options are remotely appealing. Even in the best case, you end up selling your house at a loss, having to find somewhere to rent with blown or nearly-blown credit, and you spend the next several years toiling for the credit card companies. All to avoid bankruptcy? Not worth it.

The major impediment to bankruptcy, if I am reading your followup correctly, seems to be your ex, who is pushing you away from it because she is afraid that it would do something to her credit. (Which is a bit rich, since she's apparently the reason why you're carrying so much debt...?) My only suggestion there is that you need to do what's right for you, and she needs to do what's right for her, if you're no longer a couple. I think you should get a bankruptcy lawyer and start discussing options, and you should let her know that you're doing it, and she can get her own lawyer to mitigate her exposure to bankruptcy and get her name off of any shared assets, if she wants.
posted by Kadin2048 at 1:30 PM on December 23, 2009 [2 favorites]

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