Last night I got a call from a friend who needed some advice. In good spirits but distraught, she related to me the story of the condo she bought in suburban Maryland a few years ago.
It was supposed to be the modest beginning of a new life with her then-boyfriend and a reflection of her readiness for some stability after landing a new job, in her chosen field and not far from her parents, after spending stints in New York, Los Angeles after college.
All was going well and she did, she thought, everything right. It was the height of the housing boom and with not much saved, she opted for a zero-down mortgage. Not the best decision in hindsight, but with property values literally doubling in the DC area, she thought it a good risk. Besides, her income was stable enough to take care of the place in the event of a breakup (which happened) and since then, she's made every payment on time.
In short, she's been a model first-time homeowner. But that's part of the problem. The housing crash happened and the DMV
The real problem, though, came when she started watching home values drop and new buyers scoop up comparable places for pennies on the dollar. A similar condo in her complex just sold for $125,000, a sign her place could have lost $75,000 in equity that's not likely to come back any time soon. That's made her question whether keeping the place is worth it -- or whether she should just suck up the hit to her credit by letting the mortgage go into default, and walk away.
"I'm starting to think about whether I should hold onto this place forever," she said.
I understand her frustration. Many homeowners are in the same position, watching people who made bad choices get bailed out while their own good choices have left them stuck in homes that are now terrible investments. The losses they're taking are accruing with every mortgage payment they're making because not only have they lost equity, but each interest payment is money they can't get back.
Moving and renting the place out isn't a solid option because she likely wouldn't be able to rent the place for as much as would be needed to cover her hefty mortgage payment. Staying in the place would mean sticking around at least a decade until maybe
But walking away isn't a good option either. A hit to your credit score can affect much more than the ability to buy another home; it could mean limited job prospects, higher insurance rates and potentially that a landlord won't even rent to you.
My advice to her was to give it some serious thought, and then inquire with her bank about a possible short-sale, in which the bank agrees to accept less for the property than they're owed on the mortgage. Short sales are common these days, though there's no guarantee the bank will accept that from a paying customer, which is rare these days.
If you were in her position, what would you do??
was hard hit. She borrowed $200,000 for a one-bedroom condo and hasn't missed a payment, only to watch others who borrowed more than they could afford get out from under their loans either through foreclosure or loan modifications. With a stellar payment history and relatively high income she's not a candidate for either. she breaks even on equity. Not a good look for a single woman in her early 30s.
1 comment:
yet again another good post.....you are quickly becoming one of my favorite blogs.
The question is something I've given some thought to as well. I too purchased a condo with no money down and thankfully have no problems making the payments.
But to precisely answer the question, I'd stick it out......as you've vividly pointed out that mark on my credit would limit some future potentials to and for me. I wouldn't want to marr my career potential simply because the real estate market plunged nor would I want to back track to renting when I knew I'd still want to own again in the future.
Purchasing a home was a risk, of course no one would have predicted it's current state and likewise no one can predict precisely when it will turn around.
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