Q: I am a widow in my 70s and my mortgage is underwater. Can I just let the bank foreclose and move on? I don’t want to buy again, just rent.
A: We’re not fans of just letting the bank foreclose on homes. We think foreclosure should be a plan of last resort. Underwater homeowners usually fare better if they try to market and sell the home with a real estate agent. Sometimes, the price you get by selling will be sufficient to pay off the lender and all expenses of the sale, and you’ll walk away with other options. In other situations, the cash coming out of the deal may not be enough pay all of the expenses and the lender will agree to a short sale.
When the lender agrees to a short sale, the lender may also agree to waive going after you for any deficiency in the amount you owe the lender. If you get the short sale approved and the lender waives the deficiency, you come out of the sale not owing the lender any more money and don’t need to worry about the lender coming after you.
On the other hand, be aware that the Internal Revenue Service might view the lender’s waiver of the balance you owe the lender as income to you and you may owe the IRS money on the amount waived. Certainly, however, if you sell the home and get more from the sale of the home than if the lender forecloses on the home and you have a much larger deficiency owed to the lender from the foreclosure sale, you’re better off.
You also need to remember that you might have a great credit score and credit history now, but if you stop paying the lender and let the home go into foreclosure, your credit score can take a huge hit and your credit history will show the foreclosure. Some landlords will pull your credit history to determine if they want to rent to you. If they don’t like what they see, your application for a lease might be denied. Keep that in mind before you make your final decision about which way to go.
Some cities have restricted the use of credit histories and credit scores to rent properties to tenants, and if you live in one of those, you’ll have some measure of protection. But, in general, we suspect you’ll be better off trying to sell your home. We hope you can find a good agent to help you get it done, and then be able to move on without worrying about the lender or the IRS coming after you.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)