I received a fantastic question from a reader, and it’s worth blogging about.
We purchased a house back in 06’ for 185k (still owe 170k)….houses are selling for 80k on my block now. If I buy a house on my block for 80k and move to it, can I “walk-away” from the one I bought in 06’?,, in doing so I will save more than 50% on my monthly house payment and will be able to pay the house off in 7 years.
I will really appreciate an advice on this situation.
Thanks in advance.
There is nothing stopping you from buying the house down the street, moving in, declaring it your homestead, and defaulting on your current mortgage. Obviously, your current mortgage company would sue you at some point, but, frankly, the only reason you should care is the potential for a deficiency judgment (i.e. the possibility you’d owe the bank $90K more, even after getting foreclosed – 90K being the difference between what it’s worth and what you still owe).
So how much does the potential deficiency judgment matter?
First off, Florida has homestead protection, so, no matter what, you can buy another house, move in, declare it your homestead, and live securely, knowing that house is protected. You’d just need to do so before the foreclosure on your current home is finalized.
The bigger concern is whether that deficiency judgment would impact your life in other ways. Whether it’s worth the risk depends on your situation. Generally, I think it is worth the risk, but, again, it depends. For instance …
If you don’t have a lot in the way of income/assets, you may eliminate this deficiency through bankruptcy, if not now, then in the future. If that’s your scenario, then this approach probably makes sense.
If you’re approaching retirement, don’t have a lot of income/assets, and are just looking for a house you can live in the rest of your life, then a deficiency judgment doesn’t mean much – it’s probably little more than a piece of paper. In that case, this approach also makes sense.
If you’re willing to take the gamble of trying to get the bank to waive the deficiency, or hope it never pursues it, then it makes sense. Some people are more tolerant of risk than others.
It makes less sense for people who are younger and have a lot of other income/assets. You’d hate to employ this approach, get foreclosed, get a deficiency judgment entered, and have the bank start taking your other assets.
If you’re in that latter category, my suggestion would be this. Buy the house and prepare yourself for that worst-case scenario (even if it means setting aside the monthly payments or the entire deficiency amount in a separate account). If the worst-case scenario unfolds, and you wind up owing the deficiency, then, well, you knew it was possible and you prepared for it. If it doesn’t happen, and you avoid a deficiency, then you will have drastically improved your financial situation, as that money you’ve set aside will be yours to keep and you’ll have eliminated a huge liability (the 90K deficiency). In a way, if you can view it like that, there’s no downside – it’s only upside.