Question: In your column a few weeks ago, you answered a question about “walking away” from the mortgage on a condo, but you didn’t discuss all the possible consequences involved.
Can the bank come after you to collect the money? Can they freeze your IRA or bank savings accounts?
In these times of the upside down real estate, I am sure a lot of people would find this of interest.
I bought a condo in October 2008 and I owe $258k but could buy a larger new condo in same complex for $179k. The builder went belly up and never completed the complex so the bank took it over. Please explain the possible consequences of walking away from a mortgage to buy another property.
Answer: First, let me briefly recap my previous column on “giving the condo back to the bank”:
That term is a misnomer because the bank never owned the condo in the first place, so, therefore, you can’t “give it back.”
You borrowed the money from the bank to purchase the condo, but the title to the condo is in your name. Only if you fail to make the mortgage payments does the lender have the right to take title to the condo and sell it at a foreclosure auction to recover the money it loaned to you.
A foreclosure will severely damage your credit rating for at least three or four years. And voluntarily giving the bank a “deed in lieu of foreclosure” is essentially the same as a foreclosure on your credit rating. To there is no free lunch when you “walk away” from a mortgage.
That’s what I said in my previous column, but I did not discuss the possibility of the bank going after you for recovery of the balance of the mortgage that is not paid off with the proceeds from the foreclosure sale.
For example, let’s assume you stop making your mortgage payments and the bank forecloses on the $258,000 mortgage balance owed on your condo. The bank then sells the condo at a foreclosure auction for $200,000.
Can the bank force you to pay the $58,000 difference? In short, no.
That’s because virtually all foreclosures in this state are handled through a non-judicial process called a “trustee sale.” In exchange for being able to process a foreclosure quickly and inexpensively through the trustee sale process, the bank is required to give up the right to seek a “deficiency judgment” against the defaulting borrower.
For a bank to come after you for a deficiency judgment, they would have to go through a lengthy and expensive judicial foreclosure process. Frankly, it’s more cost-effective for them to use the much faster and less expensive trustee sale process and settle for whatever they get at the foreclosure sale.
So don’t worry about your bank savings accounts or retirement accounts. The bank can’t seize your money or sue you for the balance owed after the foreclosure sale unless they use a judicial foreclosure, and there is virtually no chance that would happen for a small condo loan.
As for your individual situation, where you want to walk away from your current condo to buy a new one in the same complex for less money, that’s not likely to happen.
If you let your condo loan go to foreclosure, or give the bank a deed in lieu of foreclosure, you must wait three or four years before you can qualify for a new mortgage.
Now, you might get an exception from the bank that owns the condo complex, but keep in mind that they are not likely to let you walk away from your $258,000 loan to buy a less expensive condo because they would be losing money on the deal. However, you might see if they would be willing to let you move into the nicer unit and keep your current loan.
The bank would then sell your current unit to someone else.
I’m not saying that will work, but it’s worth a shot.
Otherwise, if you choose to simply walk away from your current condo, be prepared to rent for three to four years and pay all of your other bills on time to build your credit back up to a point where you could qualify for a new mortgage.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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