How much would you pay to keep good credit?

J

JohnnyM

2,500+ Posts
Long story short - wife and I moved back to Austin and still have a home in Cali that we have for sale. She bought the home before we were married and I am not on the Note or Deed of Trust. She is on the Deed of Trust here in Austin, but not on the Note.

The house isn't selling, and like others we are evaluating the financial sense in keeping it. If it sold today it would cost us $25-30k at closing, which we have a portion of but not all. If we leased it we would carry about $800/mo in losses (so roughly $10k/yr).

The mortgage on that house is half-way through an interest-only period, so we are not even chipping away at it but just renting it from the bank. With the money we have saved for the sale we could pay off both our car notes and do a couple other things at this house that needed to be done before we moved in (not to mention saving $1100/mo in car payments).

No matter how I try to run different numbers and scenarios, everything comes down to the fact that we would be paying likely $20-50k, either right away or over a few years, with the only "gain" to us being my wife's credit in tact.

How much would you pay to save your credit? I wouldn't consider this if we were both on the house or if this was a single person, but I just can't see how the credit score is worth the cost. And just so you know, my wife approached me about doing this and is way more ready to trash her credit (which is fantastic) than I am. I'm basically trying to figure out how this is going to screw us that I haven't thought of yet. Any ideas?

Save the morality talk about abandoning a mortgage for another thread please, I'm not asking about that. If you really, REALLY must say something along those lines, feel free to PM or email me directly and I'll be happy to have a dialogue about that, but I'm trying to get thoughts on the financial side of things.
 
I would lean toward letting the house go. I would go and talk to somebody at one of the YMCA credit counseling centers (or maybe a bankruptcy lawyer) just to see what the long term impact will be (because I think it will be far longer than seven years depending on what the bank does).

I don't know what good credit is worth.
 
If your wife is willing to take the hit, then I would seriously consider it. That way, you will have one good credit (yours) to use if credit is needed for some sort of purchase. My sister and her husband buy everything in my sister's name because her husband shot his credit to hell back in his single days. They get along just fine. She bought the house in her name and buys the cars in her name as well.

It can be a bit of a risk depending on how healthy your relationship is and whether you have any fear that the relationship could come to an end and she will leave you will a bunch of debt that she is not responsible for (that is, if you buy a bunch of stuff using your credit and not hers). Of course, this cuts both ways as you will have everything in your name and she could be cut out of any potential benefits of those items if the relationship does end.

One additional thing that I just learned and I did not know anything about (and still don't know all the ins and outs about) is that some employers will run your credit report and use that to make a determination on how good of any employee you will be. If this, for some reason, happened to your wife then a potential employer might think differently of her if she did not fulfill her obligations with regard to a mortgage and voluntarily let her obligation be foreclosed upon. Like I said, I just learned about this so I do not know a whole lot about it, just throwing it out there as additional information to consider.
 
I appreciate all the thoughts.

paso - I think the worst that can happen is a foreclosure, which would stay on her credit for 7 years after it's complete....so if it takes a year to do that, then it's really an 8 year hit. However, she will have no other debts on her report and will keep other accounts paid, so she should be able to get her score back into the mid-600s after the late payments drop off in a couple of years (at least based on my research). The foreclosure would drop off after 7 years and then there's no record of it on your credit I believe.

buster - I appreciate your thoughts and, while we haven't discussed the possibility of our relationship failing, that's probably the biggest risk my wife is taking. I really don't want her to do this, but at the same time I don't want to piss away our savings trying to save her credit just to be forced to do this in a year anyway. Regarding employers, we hope that is not a concern because we are self-employed and if my wife is having to apply for jobs, then we're in more trouble anyway!
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BW - It's listed as a normal sale right now but we will probably switch that to a SS sometime soon. Our problem will be that the bank will look at our household income and may decide that we make enough to afford the payments and thus not approve it. I have been referred to an attorney's office down there that negotiates SS with banks and is highly effective, but that costs around 4% of the contract amount (which normally the bank wont cover so we would have to) so it's a possibility, but if it's going to cost us just as much we'd just rather use that money on other things.

Honestly, all the advice I get online says to stop payments, forget the SS, and just lease it out and pocket the cashflow until the foreclosure goes through. We don't want to do that to any tenants so we are unwilling to lease it out unless it's a month-to-month situation where the tenant knows what is going on. Of course, notifying the tenant that you've stopped making payments often makes them (incorrectly) believe that they don't owe rent - so honesty can really complicate that situation, but we're not willing to sign a year lease knowing that they may get kicked out before then. We had a family we thought was on board but last night found out they went with a different school district, so they're out.
 
Yes I am looking into a DIL as well, I just don't know if we'll have any luck because it's a lot like the SS process and they don't like to do them very much anyway.
 
well, if you go short sale, and price it appropriately, expect it to sell.

My GF just put in an offer on a SS condo in Aliso.

One of 12 offers. Her agent told her multiple offers are the rule now, not the exception.
 
I'm not as worried about getting the offers as I am about the bank accepting a SS given our financial condition as a couple. If they only looked at my wife's finances it would be a slam-dunk, but since they look at overall household income it may be a lot more difficult. Still gonna try it, we just don't really expect much out of it!
 
I think my big concern would be if the bank gets a judgment and pursues it. I seem to remember from the bar exam that a separate debt can look to community property. I am not sure about this and would research it. You are probably judgment proof in Texas anyway (since almost everyone is).

They also can keep this on her credit for more than 7 years by first reprting it and then later taking a judgment.
 
The property is in California so she cannot be pursued for a deficiency judgement since this was a first lien purchase-money loan on a primary residence. That was my first area of concern but it doesn't look like it would present a problem.
 
Don't let short term pain cause you long term pain. 25-30k for your situation, career(not even including your wife) should not be hard to overcome.

Don't take the easy way out. She may need her credit.
 
used to be that a short sale or DIL had tax liability..."debt forgiveness" is treated as income. Congress did away with that recently.

Otherwise, everyone that did a short sale would get hit with a big tax bill.
 
There are certainly going to be consequences (higher rates, possible turndowns) but my belief is that the volume of foreclosures and BK's over the last few years will push lenders to be more creative/forgiving in their lending standards down the road. If the only debt you default on is the house, my personal bet would be that you'll be able to find lenders who'll finance most things within a year and major purchases within 3-5 yrs. Your credit score won't likely rebound for a while so you'll probably pay 4-6% higher on home/auto and you'll likely be at the ceiling on unsecured debt. You'll probably need to put down much larger amounts going forward as well.

Speaking from a historical and personal experience perspective. It didn't much matter to the mortgage company I worked for whether it was a SS, DIL, BK or foreclosure. They recieved rougly all the same underwriting scrutiny because they all indicated essentially the same thing. (you became unable or unwilling to pay as agreed) If you go that route, I would go with the cheapest version, which is usually just to walk away without trying to do SS/DIL etc.
 
We leased the house, skipped the payment, and will go for a loan mod. If the bank isn't willing to move to something that makes it affordable for us to lease out, it will likely be lost through foreclosure.

I was up front with the tenant about the situation, and told them that we could lose the house through foreclosure. We put them on a month-to-month lease that allows them to look for other housing and gave them a below-market rate. I think it's pretty ****** to not tell a possible tenant you're not paying the mortgage and they may get kicked out, but after putting it all on the table with them I am satisfied that we were as honest as we could be. My mother-in-law still thinks it's immoral and ethically wrong to rent the place and not pay the mortgage.

We had some money set aside for this that we've used to pay off our cars, will put in a pool fence (see earlier thread about kids and pools), and will put some money aside for emergency fund or retirement. We just missed the payment's grace period the other day so I imagine we are still a few months from any credit impact or other negative consequences, but they are coming.
 
Johnny, is the investor Freddie Mac or Fannie Mae? If so, the tenant will not get evicted if they are paying rent on time and the property goes into foreclosure. In fact, they may be safer if you enter a lease agreement with them. Again, depends on investor.
 
Freddie is our investor. I hadn't really thought much about how they would be affected at the time of foreclosure - other than telling them it was a possibility and thus putting them on a month-to-month so they could find another place. I think they will stay as long as possible due to the rent being pretty good. If Freddie owns this and it goes through a foreclosure sale, they're going to have to move out anyway, right? Honestly I don't know at what point in that whole process the bank actually asks occupants to vacate. Is it at the beginning of foreclosure proceedings or just by the time of sale?
 
Clark Howard was talking the other day, so according to what I heard on the radio from him for what it is worth, that the forclosed property law has now changed to allow any leassee to stay through their entire lease.

So the month to month is actually not good for your renter as I heard his explanation.

Found this article on his site:
The Link
 
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