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A mortgage default harms your credit for a number of years
By Edith Lank | Columnist
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Published: 8/7/2010 11:24 PM

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Q. In layman's terms, can someone explain the repercussions of walking away from my present mortgage? It is higher than my home is worth and the banks don't help. Therefore, since the government keeps on bailing them out, I want to walk away.

A. If you walked, your credit record would take a bad hit, making it nearly impossible to get another mortgage loan for years. A low credit score can sometimes raise your insurance premiums, make it difficult to rent, or hurt future employment prospects.

In addition, in some cases and in some states, the lender may seek a judgment against you personally for the portion of the mortgage debt that wasn't repaid.

Your best bet is to contact your lender to find out if any mortgage modification help is available. New programs do come out from time to time.

But if you can afford to pay your monthly mortgage charges and you don't need to move, it doesn't really matter how much you could sell the house for. You're still in the same position you were when you bought it. Just hold tight.

Q. I am an amateur investor. I buy a house or so a year, fix it up and sell it, which helps with both cleaning up properties and getting some off the foreclosure rolls at the banks.

When I have tried to sell one lately, it seems the banks are doing everything they can to hold up the transaction - sending out more appraisers and inspectors, changing deadlines, or making requirements like fixing a paint spot the size of a pinhead that might have peeled. Basically, making it next to impossible to do business.

What's up? I thought the country wanted to get out of the mortgage crisis? How can I protect my rights, seeing they pretty much ignore the terms of the contract?

A. If you think a bank is not living up to its written contract, you can get your own real estate lawyer to intervene. Right now, banks are sensitive about having made risky mortgage loans in the past, and they're being extra-picky. They're also subject to some stricter new guidelines.

Given the mortgage mess of the past few years, though, the recent precautions are pretty much like locking the barn door after the horse is stolen.

Q. After selling our townhouse, we discovered the payoff had been applied to the wrong mortgage. The mortgage company is trying to clear up the problem. The closing attorney is uncooperative and will not answer the mortgage lender so that the error can be corrected. What can be done about this?

A. You can file a complaint with the county bar association.

Q. My in-laws signed over the deed for their old house (they owned outright) to my wife and I, so they could qualify to get a loan to buy a new house. They are now living in the new house. My wife and I live in their old house.

We have verbally agreed to make payments to them every month for 12 years, even though we actually own the house. Now they want us to sign a promissory note that states how much we will pay over the next 12 years. My concern is that what my in-laws did might have been illegal, so I'm not comfortable signing anything.

Also, do they need to report our payments as "income"? Or would they need to if they still held the deed (which they can't because of their loan)?

A. If you're paying for the house over a period of years, signing a note and mortgage is standard procedure. It would be particularly helpful if your wife has siblings who might be heirs when your in-laws died. Getting family transactions down on paper helps head off problems later.

I can't understand, though, why on earth your in-laws had to sign over a house they owned free and clear just to qualify for a new loan, so I can't comment on whatever it is they did.

If you sign a note and mortgage that's entered in the county's public records, you can take as an income-tax deduction any interest you pay on the loan, and they must declare it as income. That's assuming they're charging you interest. Under the home seller's tax exclusion, the part of your monthly payments that represents their actual profit on the sale can probably be taken tax-free.

Consult a real estate attorney and a tax professional to get all this straightened out.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (please include a stamped return envelope), or readers may e-mail her at