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What are the legal ramifications of foreclosing on a home (with an existing mortgage) after buying a second home?
A little background, my wife and I bought a house roughly 15 years ago. At that time the neighborhood was safe and home values remained steady. Within the last 5 years the city (in which we live in a suburb of) has gentrified many areas pushing undesirable elements into our neighborhood and the police cannot keep up with the problems. As a result home prices have dropped drastically, and many owner occupied homes have elected to turn their homes into rental properties, walk away, or sold them at a great loss. A nearby neighbor purchased their home after us for 110k and sold it a few years ago for 20k.
Gunshots, car break-ins and open drug dealing has become commonplace seemingly overnight. A registered sex offender is renting the home next door and running a speakeasy out of the home. It is not uncommon for 50+ people to be over the hedge partying and peeing on the hedge while music blares all hours of the day. A week ago someone was shot in his backyard. It is no longer safe for our children to be outside at any time of day. My wife insists on moving asap but we have 55k remaining on our mortgage.
We have been house hunting and have obtained pre-approval, but don't want to lose 55k paying off the first loan on a home that is essentially worthless. As it stands the house is unable to be sold. When the realtor came to assess our home she saw it first hand and suggested that under the current circumstances it would be very difficult to sell the home. We have reported the situation to the police and in turn our dog was poisoned.
I understand buying a second home with the intention of foreclosing on the existing home is a slimy move, but when it comes my children's safety, I would rather be a slimeball than have one of my children hurt or worse.
What is the worst that could happen if we followed this course of action? Could the foreclosure of the first property affect the second home after the new mortgage is finalized?
I apologize for providing too much, too little or confusing information. I'm a bit frazzled and not familiar with message board protocol. I appreciate any information on the subject. Please do not hesitate to ask if you require additional information to provide an accurate answer.
Is the current home in a Recourse or Non-Recourse state? In other words, will the mortgage holder still be able to come after you and your assets for the difference between the monies owed on the mortgage and what they finally unloaded it for? Although you can get away with not paying the 55K owed if you walk away and not sell for a loss, they may still get that and more from you (not to mention the hit on your credit).
I would call another Realtor and see if their assesment is the same just in case.
Then I would start researching other options. I never like to recommend walking away but in your case as described, it may be your only option. How can you protect yourself and assets? See an Attorney and see what they have to say.
I had to look this up but the home is in a recourse state. Would declaring bankruptcy help?
Again, thanks for your assistance.
If you are in recourse state, the lender can pursue you for repayment. In all likelihood, they will win a collection suit. You need to look at the laws in your state to find out if the lender can can convert a judgment into a lien attached to your real property. If so, that judgment will stay attached to your property and accrue interest at a statutory rate (if renewed by the lender which they would probably do given the amount). Whenever you want to sell, or your heirs want the property after you death, that lien will have to be repaid.
Bankruptcy prior to that judgment may eliminate that problem, but you'll be hounded by zombie debt collectors for a long time. Your state law may dictate what will happen to that debt after a judgment against you. Bankruptcy will also trash your credit for several years and stay on your credit report for 7 years. You may have to include any and all debt you have in the bankruptcy filing.
You need to talk with an attorney familiar with bankruptcy and credit and collection issues in your state. Just remember that the attorney will likely recommend bankruptcy because that's what they do. You need to be sure that you understand the entire range of outcomes.
I was in a somewhat similar situation. I’ve been in my current home for 15+ years and a few years ago my house was broken into. Although my neighborhood is still good I still feel incredibly vulnerable. I’m single with no children and travel quite a bit for work so my anxiety levels are high when I’m not home keeping watch. My security system doesn’t give me much comfort.
I had made some bad decisions when it came to cash out refi’s and the home prices in my neighborhood haven’t risen. I owe about $10K more than what I could sell it for. But I need to move. For my own mental health.
I found a new community being built which includes garage townhomes. I was pre-approved and signed a contract. I had two options for my current home – sell or rent. I couldn’t sell without it being a short sale so I decided to rent it out. The rent I am asking is not very much over what my mortgage payment is. My conscious would not let me go into a new home contract with a plan to foreclose on my current home. However, if my tenants decide to screw me over and not pay rent, then I’ll be forced into a short sale/foreclosure situation then. But by then I’d have already closed on my townhouse.
And I DO have every intention of continuing to pay the mortgage on my single family; provided of course my tenants pay their rent.
My suggestion is to place an ad on Craigslist – with pictures and approximate location of home – and see what bites. Maybe the selling point for potential renters is that you will 1) accept less than stellar credit and 2) work with them on security deposit.
For me, I found some pretty awesome tenants on CL and they move in next week. I’ll be closing on my new home in early November. After November, whatever happens happens.
Good luck to you and your family. You need to leave there ASAP and if that means going into a rental for a couple years after the short sale or foreclosure, then so be it. Family first.
This response is not a substitute for legal advice and I am not an attorney.
Recourse v nonrecourse states are the reason California fell hard in the housing crisis. (AK, AZ, CA, CT, ID, MN, NC, ND, OR, TX, UT, WA are non recourse). In these states you can pretty much walk away without a care. In recourse states, the lenders can attach your other assets, garnish your pay, which will force you into bankruptcy. Or, if the lender writes off the loss, you could find yourself with a 1099 for the amount of the mortgage. Now you get to deal with the IRS, which Bankruptcy will not protect you from the IRS. How much is the balance on your mortgage? 80K? How much are Federal and State taxes on that little gift?
What you propose doing is a buy and bail. Have you purchased the 2nd home? If not, what you put on that application can be used against you by the defaulted lender, and possibly, face criminal charges. Be very careful and do not attempt this without investing in a legal consultation, first.
There's nothing saying you have to move from the defaulted home to ownership in a new home. If you are eligible to declare BK, you would be eligible to purchase in 4 years provided the home was listed as you intend to surrender the home. If it's a foreclosure with no BK, the wait is 7 years. (Note: VA and FHA is two years, but I think you would have mentioned if you were VA eligible, and FHA's insurance should be avoided). Moving from a defaulted home into a new purchase begs for deeper investigation.
Only you can decide what is best for your family. If it is that unsafe, get out now. In this situation, it can cost you dearly trying to get things lined up perfectly. Get safe, first, then figure it out.
Why not just rent the house and hope for the best?
I wouldn't wreck your credit for a 55K mortgage. How much is the payment?
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