I just got a rather difficult question in my inbox, and thought that it would be a good idea to get some perspective and advice from my thoughtful readers to help another reader. Be gentle! I think this could happen to many of us.
Jonathan – what would you do in my shoes:
Parents are in their late 50’s, bought a house they can’t really afford (@7% interest rate) and are going to be foreclosed on within the year.
If I co-sign/add my income to theirs, together we make enough for them to qualify for a refinance @4.5% 5/1 ARM. Possibly long enough for them to sell the house in the next 5 years and recover some of their lost equity (80% of their savings were tied up in the downpayment that has almost all evaporated).
However, I obviously take a credit hit and a significant risk if one of them can no longer make even the reduced payment. I am single, without kids, and in my late 20’s, working an average job (moderate job security).
Thanks for any suggestions – your blog has spared me the same fate as my parents.. so far.
First, I’m glad to hear that you are trying to help your parents, even though they made a significant financial mistake.
Do you live in a non-recourse state, where they can’t go after other assets if you default on a mortgage loan? Have you confirmed that you can get the new loan with the current loan-to-value ratio? Your income might be enough, but they still might reject or require another downpayment. If so, how much does lowering the interest from 7% to 4.5% lower the monthly payment? Would your parents be able to afford the new payment without assistance? How stable is their income?
In the end, I would say that if this requires large cash injections from you and not just your credit score and income verification, it is risky to bet that your home value will rebound in 5 years. It might, or it might not in such a short timeframe. If they live in a non-recourse state, I would at least explore the possibility of having your parents let the house go and get by with bad credit and the rest of their savings. Can they rent a place for a lot cheaper?
However, if they can swing the new payment with your co-signature only, perhaps it is worth a try. The hardest part is probably convincing your parents to downgrade their lifestyle and housing preference to something more realistic. It’s a tough situation. What would you do, readers?
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Don’t do it! It’s obviously a hard situation but I think the best solution would be for the reader’s parents to figure out something with the bank, whether it be a modification or as a last resort, foreclosure. I’m not sure if the reader read the article, My Personal Credit Crisis, on NYT but the author hasn’t made a mortgage payment for about a year and he is still living in his highly leveraged house so maybe his/her parents could do the same and save the $ for future rent payments. There are senior apts. that provide housing at subsidized rent if the parents do end up renting due to foreclosure. The reader would be in a better situation to help out later if he/she isn’t tied up financially with the parents now.
The person writing in is in a perfect place to help his or her parents. I know I would help mine. Maybe the writer could even move in with the parents to cut expenses. My parents have helped me so much I know I can never repay them.
Take a look at Mortgage Forgiveness http://www.irs.gov/individuals/article/0,,id=179414,00.html
This all depends on how much down, how much owe, how much paid, how much current value.
There are also loan modification program.
If you refinance, I would to with fix rate and not ARM. I just completed refinance for myself and my brother-in-law is doing it too. Fed cannot keep rate this low for long.
Best of luck.
Awesome of this guy to want to help his parents. First and foremost I hope he learns from their mistake. We tend to think of our parents as full of wisdom until they do something crazy like this.
Waiting the five years is a risky proposal on an ARM. The value may or may not come back up an interest rates are sure to go up. With the low interest rates are they not able to get into a traditional mortgage with say 5%?
With that in mind go back to the lender and explain the situation. Let them know they will be getting this house back unless they play ball. If that doesn’t work I would look at talking to a credit or small local bank to help with the refi.
Do your parents have a history of living beyond their means? If yes, do NOT assist them financially.
Do your parents use credit cards to finance their cost of living? If yes, do NOT assist them financially.
Do your parents pay their cable or cell phone bills before they pay their mortgage? If yes, do NOT assist them financially.
Do your parents have cable/satellite or cell phones? If yes, do NOT assist them financially.
Do your parents spend any money on ‘wants’? Do they go to restaurants? Do they buy anything that is not food, water, critical utilities, healthcare? If yes, do NOT assist them financially with the mortgage. They should help themselves first, before you help them.
Do your parents have anything other than very basic AND economical transportation that gets at least 25-30 MPG? If yes, do NOT assist them financially. The should downsize they cost of transportation before you assist them financially.
Are your parents willing to consider getting out from under the house immediately (by either selling or letting the bank take it over) and getting into a situation where their cost of living is WITHIN their personal range of affordability? Even if it is a basic apartment? If no, do NOT assist them financially.
DO you plan to get married? Have kids? If yes, do NOT assist them financially. You owe it to your future spouse/family to have the ability to take care of them.
Your parents “bought a house they can’t really afford”: Then you MUST let the foreclosure process proceed. They are adults and MUST accept the consequences of their actions.
Do NOT assume the house value will rise significantly. Do NOT co-sign based on this invalid assumption.
If you choose to get involved, be very sure you can afford it without negatively impacting your standard of living. There is a very good chance you will deeply resent them in a few years, even if you think now you can handle it psychologically.
If you choose to give money, it must be a GIFT, not a loan to family members or you will resent them later when they do not pay it back.
If you choose to cosign, assume you will be fully responsible, because you are. Do NOT hope and pray for an increasing home value. Can you also afford the maintenance?
If you choose to cosign, assume your parents will never be willing to move. Are you going to force your parents to sell and move in 5 years? Trust me, older people much prefer to stay where they are.
Sorry for the blunt comments, but they originate from decades of personal experience.
Please do not help them. If they are acting like children, treat them like children. They have proven that they have no clue how to handle money or make decisions regarding it and it would be foolish to get yourself and your future (financial and otherwise) tied up in their bad lifestyle choices.
losing your house is not the end of the world. If they’re in at least relatively good health, they have 10-15 more years to produce and can put away enough money to live comfortably in a small apartment, driving beaters, sneaking coke and cookies into the dollar theater for their date night. If they do all those things, then it would be a great thing to help them out and add to their lifestyle once they’ve figured out how to live within their means.
Wow, thanks so much for posting this Jonathan. Here is some additional information:
My parents live in California, which I believe is considered a non-recourse state (although a quick google search says that refinance cash is considered a gray area — my parents had already refinanced once to get out of a second mortgage at ridiculous rates)
The loan to value is highly variable given the property assessment. Using the same method of averaging Zillow, Cyberhomes, Coldwell Banker, and Bank of America (without any liquidity discount or conservative 5% discount) shows LTV at 73%. The swing between min and max of the methods is over $300K though.
The difference between the 4.5% and 7% loan is a bit less than $1500 per month (yes, that’s the crazy size of the house my parents bought, making roughly $65K combined per year).
My parents would be able to afford the new loan, although they would still be saving very little (not enough to max their 401(k) or IRA). Most of the plan would hinge on selling the house. I am hoping proceeds from the house, coupled with retirement in a much cheaper state/location, should allow them to live out retirement peacefully, albeit many vacations or significant spending money.
I tried to convince them to sell the house a few years ago, and they refused to talk about it. Now that they’re on the verge of financial collapse, I think they’re a lot more receptive.
To be clear, they’ve drained all of their savings paying for this house over the years, as they obviously have negative cash flow. I’m still not certain why they thought it was a good idea, but with a new mortgage, they would at least be able to start saving again.
Do you realize that you become legally responsible for their mortgage if they default on the loan?
Do your parents work? If so, what kind of income do they make and how liekly is it that they will be able to swing the refinanced payments?
Becoming a co-signer of any loan is something to consider extremely cautiously, whether it’s for one’s parents or anyone else.
Personally, I think they should dig themselves out of the hole they’ve made and not jeopardize their son’s finances.
As my mother always says. “Don’t send good money after bad.” It sounds like to me they got themselves in a bad situation through a bad financial decision. Unless they have learned their lesson you are going to put yourself in a bad situation to try to help them.
I commend your effort to try to help, but I think this situation is on life support and you need to pull the plug. The best course of action for them is to go ahead and try to do a short sale. They will take a hit on their credit and loose the money they put into the house, but at least it will give them a good place to recover from. It’s far better than loosing your money and going into foreclosure or declaring bankruptcy.
Also, as a little bit of advice that may be a little shady, but we are talking about banks here so who cares. If a short sale went through wait until the day after Thanksgiving and have them challenge it on their credit reports. All creditors have about 30 days to get back with to verify the info. or it has to come off your credit report. During this time a lot of stuff falls through the cracks because it’s the holidays. So they may be able to get it off their credit report entirely. Again this kind of shady, but you got to do what you go to do sometimes.
This one is easy.
DO NOT CO-SIGN FOR ANY LOAN…EVER!
I’m sorry your parents made a bad decision. Good luck!
I think this really depends on your relationship with your parents.
For me, I would definitely help because my parents sacrificed a lot for me. Also, I know my parent are responsible people.
However, I would also demand that they change their lifestyle to make things work (that’s supposing they are wasteful in some areas, e.g. cable, Starbucks, etc.)
Let me put it this way, would your parents be willing to give up their life to save yours?
Like others have said, co-signing a loan would not be helping. It would just be prolonging the denial that they are able to afford this house; it also puts you in a huge financial risk as well. Since they have drained their savings and are going to get foreclosed on, this house has not been a blessing. I think putting your financial future on a sinking ship is not the wisest thing to do.
I would try to convince them to put their house up for sale immediately. Even selling the house in a short sale is better then a foreclosure. Let them rent for 2-3 years to let me get back on track financially. That will allow them to build up their cash savings as well at their retirement accounts.
I think it is honorable you are trying to help your parents. It has to be heartbreaking to see them in this position. But refinancing this loan with your name on the note is not the way to go in my opinion.
JW
Never ever co sign!!!!
Give a give of money and be done.
There is a reason they are in trouble and its not because they don’t have enough money.
They obviously don’t need that size of a house. I am 23 years old and make as much money as your parents combined (gross, before taxes) and I wouldn’t even think about it. Mind you, I am in a much cheaper state (Minnesota).
I would not do it. I have learned many things from my parents, including money and what NOT to do. I would use this as a hint. Unless, you want to live there too 😉
How do you know they are going to be foreclosed on within a year? Are they behind on their payments?
Late 50’s is not old. 7%ARM is really not bad either. I just got a 4.7% 30 yr. in April. How much HELOC did they pull out and where did that money get used?
Can you rent the house to make the payments? “Temporary rental” for tax purposes if possible and they can rent an apartment.
I’d like to know how much property taxes and insurance enter into this $1500 payment and what is actual P&I? What’s the actual amount owed?
I’m 65 and I carry my daughter’s rental property maintenance because real estate has left her without any funds. I bought sf with 401(k) money and did quite well when I sold it. Perhaps they should be looking at that.
Don’t cosign anything for anyone. If I partner up with a family member they’d better be made out of steel and good for all expenses forever if necessary.
Let them both get jobs if they don’t have them. Something doesn’t sound right here.
I have an alternative solution, one which I’m actually looking into right now. I have the same situation with my parents, the only difference being that they have 1 child still at home, and 3 others that are 18-21.
I am thinking of telling them to just go bankrupt. As bad as it sounds, they don’t qualify for the mortgage forgiveness or refi plans, so it’s the best alternative. Instead of my paying down their mortgage so that they can refi and afford the payments, on a house that is worth about half of what it was when they bought it, I’m going to put that amount down on buying a new house. Since CA prices are so depressed, I can buy a house that is nicer than their current home, for less than they currently owe, and the mortgage payment will be half of what they’re paying now. They can then pay rent/the mortgage payment to me.
The big difference is that I own the house instead of them. Since they’ve got themselves into this kind of financial bind in the first place, I don’t really trust them to keep themselves out again. So for me, this is a good thing.
What do you guys think of this plan?
Your parents sound like the exact people to qualify for restructuring, where the rates could be as low as 2%. Have they looked into any of these offerings or are they just finding a low rate at a regular bank? I definitely think helping your parents is a great thing to do, if you are in the position to do so. But, is it ABSOLUTELY necessary? Can you or them put in more effort finding them a better loan that they could secure themselves? I would rather scour those possibilities before co-signing a loan. And, probably I would have the “For Sale” sign out too. If they can get a quick sale, you can avoid all of this. I would not wait 5 years, there’s no telling when housing prices will be at those same levels. Here’s a link to the government modification program with a 2% floor:
http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf
Helping out your parents is commendable. I think the guy needs to sit down with his parents and talk about their financial situation as a whole and not just an unaffordable home. Losing a home is extremely traumatic but not the end of the world. In the discussion with the parents following scenarios may be studied:
1) the situation is dire and there is other debt/no savings. Let go of the house. Help them get an affordable apt.
2) the situation can be salvaged by doling out ‘x’ amount over ‘y’ years. This is a gray area. Can you afford to do that without harming yourself?
3) the situation can be salvaged by renegotiating the mortgage and/or by having you cosign. In this case can you work with your parents to curb the behavior that got them in this situation? Can you work with an attorney to figure out joint tenancy laws etc.?
Talk about being adult and responsible is utterly distasteful and does not help the situation. It is important to keep the tone of discussion conciliatory and not accusatory. People are welcome to be accusatory here on the comments section but it is not the way to talk to people in real life.
Clearly, mistakes were made and are being acknowledged by the parents by asking the son for help.
If the LTV is really 73%, why can’t they just sell the house?
Even if it isn’t, as long as they can break even, they should sell the house.
I think this really depends on the relationship you have with your parents.
I would definitely help my parents because I know they have sacrificed a lot for me. Also, I know they are responsible people who might have made a mistake.
However, I would insist they change their lifestyle to accommodate (e.g. get rid of cable TV, daily Starbucks, etc.)
Let’s put it this way, if you were in some life threatening situation, would your parents give up their life to save you?
Do not co-sign a loan for them.
You’re a good kid for wanting to help your parents. But in this situation trying to keep them in that home really won’t help them in the long run. They can’t afford it no matter how you cut it.
From :
“The difference between the 4.5% and 7% loan is a bit less than $1500 per month (yes, that’s the crazy size of the house my parents bought, making roughly $65K combined per year).”
If the difference between 4.5% and 7% interest is $1500 per month then I’m estimating that your parents bought a home worth something in the $750k to $1M range. Yet they have income of $65k.
They bought a home that is far too expensive for them to ever afford.
If the loan is $700k then even at 4% interest the interest alone is $28k a year. Thats almost half their income.
They should sell the house and downsize to something reasonable that they can actually afford.
As their child it is not your job to bail them out of this kind of situation so they can stay in such an expensive home. That house is a luxury they can’t afford.
Don’t even think about doing this with a 5/1 ARM. A 7/1 or 10/1 ARM is a better bet if you are waiting for home values to improve.
I would not co-mingle finances unless you and they are willing to live under the same roof as you and live by your rules, including putting your parents on an allowance. If that sounds crazy to you or them, then don’t co-sign on a loan because it will lead to this.
Another solution: Rent out some of the rooms. There is a very high demand for this. For that size of house not many are going to want to rent the whole thing for $2000+ a month, but you can easily get $600 to $800 a room.
I personally could not say no to my parents in this situation because they are my parents and there isn’t anything I wouldn’t do for them and I know there isn’t anything they wouldn’t do for me. This might not make sense financially but that’s the relationship I have with my parents.
That being said. I look at everything as worse case scenario.
1. If you co-sign on a re-fi (love the abbreviations) then assume the house will never sell and that the interest rates will go up. This would prompt me to look at a different alternative with regards to financing (30-year fixed or 15-year fixed vs. ARMs).
2. Assume your parents will stop paying on the loan even after you re-fi (again worst case). This means you should be able to afford the payments on your own.
What I would do:
Help them with the re-fi (again, not financially sound but the emotional response). Then I’d move in and start looking at trying to sell the place ASAP or find renters to take up some of the slack. They would have to agree to let me manage their finances on some level also to make sure every dollar was being spent/saved as efficiently as possible.
At the end of the day It comes down to which matters most. Your parents keeping their home, or you keeping your credit report in tact assuming things fall apart if you help out. Given the fact that my parents raised me, put me through school and kicked my butt when I needed it for me to turn out the way I did…I’d be willing to take a 10-year hit on my credit report if it meant I might be able to re-pay them for what they have done for me.
P.S. I’d help out here but not if they called asking for something silly like co-signing on a new BMW. I could say no to that.
Would your parents have done this for you? How much did they spend to raise you? Would they give anything for you?
Are you able to help them on their existing payments instead of co-signing? You shouldn’t be on the hook for their mistakes, but do consider what they’ve given you.
Simple action plan:
1 – your parents sell current house,
2 – your parents move into cheaper house or apartment (they can relocate to a cheaper state if necessary, you said they want to do this for “retirement” anyway, so why not do it now?)
Please please please do not co-sign. As bad as the situation is, you have to think of it from your own perspective. You are in your 20s. If you do this, how will you be able to get married or start your own family? I’m sure your parents would rather live in a different house than hurt their child’s well being. Unless you’ve got enough money to support your parents’ mortgage *AND* your mortgage *AND* any future spouse or kids, you need to look out for #1.
This is a BS question. 1 in 15 homes in the joke of a state CA are in foreclosure. Tell them to start a fire and claim insurance. People in Detroit have been doing this daily.
More than ever Texas should break apart from the US. The US is following CA and Detroit into bankruptcy.
Go ahead and cosign it won’t matter anyway. Don’t you love then? HAHA
Thanks for all of the support – it sounds very much like it is recommended to not co-sign. Some additional information:
Yes, I’m very well aware that I would be legally responsible for the mortgage as well should I co-sign. While I do plan to get married at some point, I feel like I owe them for raising me (my dad and mom both worked 2 jobs when I was growing up). They put me through college at great cost to themselves (I was naive/stupid/lazy and didn’t realize the importance of student loans).
Yes, my parents have made significant financial mistakes including purchasing this house and buying expensive cars, but they have zero balance on all of their credit cards and have been current on all the payments. The reason they would be foreclosed is that their savings are pretty much depleted (gone by end of year at current rate) and they will no longer be able to make payments. They *have* realized their mistakes and have significantly cut back on all spending – no eating out, no cable, no air conditioning/heating, etc. They do both have jobs (dad has fairly stable, 17 year income, mom just got a new job in the last year) However, they are just very against selling the house at current value as it’s where they have the last of their savings.
Property taxes are an additional 5-10K on top of the mortgage (so none of it is included in the $1500 estimate), although that number has come down as the property value was reassessed. I tried renting the house out a few years ago, when they refused to sell it, but there was no one looking. Renting out just a room or two is a great idea and I will suggest that to them today – thank you. Also, the neighborhood also has a number of short sales and foreclosures on the market, making it fairly difficult to sell now. (I do question the property assessment as several of the neighborhood homes are on the market at far below the estimated value of our property)
Fixed vs. ARM – Penfed is charging 1% origination fee on all fixed loans (which would be several thousands of dollars up front) – I’m not sure if this is worth it. 7/1 ARM might be feasible. Any other recommended banks for mortgages?
Additionally, since I do stay there occasionally to look after them, a co-worker recommended that I look into paying the mortgage if I co-sign. They would be able to gift me up to $26,000 every year, and if I paid the mortgage I could take tax deductions (I am in a higher tax bracket). That results in some extra savings. Does this sound reasonable?
As long as we are on the topic of family and money, perhaps I could get some help. Given the circumstances it is hard for me to ask those around me.
I am currently in my mid 20s and my father has borrowed money from me on several occasions. He is self-employed and has had health problems that have cut into his work productivity. The first major loan I made to him was when I was a senior in high school ($2500, money I saved from working in the summers) he ‘paid’ me back three years later (no interest).
Within the last three years he has borrowed much more and has been slow to pay me back. Recently I discovered that he has been gambling quite frequently and may have a problem. I confronted him about it and he denies that he has a problem. Even though he (we) can make a lot of money in our business, he is always broke and complaining about money.
Anyone have any pointers? I realize that some of the answers are obvious. Also, I have made it clear with him that I will no longer loan him money.
Follow up to my prior comments: to put it bluntly, if you co-sign or loan them a significant amount of money, then you are essentially marrying them, financially speaking. They will essentially be spending your money – often times in ways you do not like, so you have to be prepared for that.
It is much easier and less messy to help them with a few monthly payments. Case in point: When my sister in law was facing bankruptcy we offered some help but it soon ballooned to a total bailout, because we were incapable of drawing a line and cutting off the help. In the years its taken to pay us back there has been animosity because we believed every dollar she spent was non-essential and should have gone to paying us back. Eventually she had to move in with us so she could pay us with money that would otherwise go to rent.
Only loan money to a friend or relative if you are OK with it never being paid back.
Well #$(*#$(, Penfed just put a 1% origination fee on *every* loan.
The answers are always simple when dealing with numbers as it is an exact science, it is our emotions and feelings that complicate things do not mix the two.
Your parents have had to have owned the house for quite some time if they have 80% equity (I take it that is what you mean there savings). So at some point they must have taken equity out to have such a high mortgage. For what I read they seem to live beyond there means (as so many people do.) We tend to think that the banks and credit card companies, non profits, government are our friends THEY ARE NOT. These institutions have very smart people capable of creating complex algorithms in order to predict the outcome of a specific individual *there is no probability in their instruments*, and I bet you they have already taken into account the family members of your parents including you. Your parents will never be offered something that will help them because you exist and are good insurance for the institutions that have an interest in this deal. For one you are younger, two single, three more likely to be able to pay off what ever debt and they know you will do ANYTHING to help your parents (almost all of us would) so they see nothing more than $$.(what ever they agree to do rest assured if they agree it will be because they will profit even more than they do with the existing contract and the terms of the contract are better than before (protects them more specially with the changing times).
Take yourself out of the equation and let the damn sharks(banks etc) deal with there greed and there arrogance, realize that they win if you foreclose, sell the house or keep the house this is why they can play hardball they hold all the “aces”. It is our own fault when we agree to do things we do not understand or just think we do. If your parents make 65k a year combined they should have never been given a loan like the one they have (why do people think they can repay loans that with interest accrued and all other expenses involved one would most likely not make enough money in their whole life to pay for such expense let alone all other aspects of life.
This is what I would do in your shoes:
Offer your parents to move in with them but only if they put the house on the market TODAY. (this is all assuming you are liquid and free to do as you want *hope you do not have a house of your own as well*.) You can pay rent to them instead of your current land lord (if this is applicable to you) this will offset the cash flow problem with your parents, keeps you from becoming legally responsible for the mistakes of your parents and will let you feel good that you are doing something for your parents. Have everyone go to survival mode and spend only for essential things to better aid lowering the debt. Think of it as war you do what you have to to survive even if it is far from the American dream all of us in need to go back to Cash bases and valuing what we have instead of always wanting more, I am not saying not to dream big but do it in a responsible way.
Once the house sells make sure everything is settled (leave nothing unsettled) Go back to your life as you were doing so far and let your parents have a reality check as to where they are in life now that they are safe from the “Sharks” and if they have any sense of responsibility they will learn form the past mistakes and find a place to live that will not take more than 30% of there total income (net not gross). They should be putting 50% aside to try and build a nest egg again and use the other 20 for everyday expenses. (keep it realistic). And perhaps once they have there life back and have control of there finances the next time the SHARKS offer stuff like CASH FOR CLUNKERS, OR NO MONEY DOWN for 6 months, OR What ever crazy instruments invented in the future to take your money and eventually your freedom with the promise of non lasting destructive instant gratification they can say NO THANKS!!
It is easy, its like saying NO TO DRUGS!(when you do not use them).
Buy only what you can write a check for not what you “think or told” you can afford, only leverage yourself if you have the money “CASH” to back it up should your reason for leveraging yourself go bad. I know this seems to be impossible to do now in days because we have spent the better part of the 20th century raising the bar in each generation defining successful all along forgetting how to fish and expecting to be given the fish every time we want it (credit cards and alike instruments).
Best of luck if you can’t take comfort on anything at least take comfort in the lessons learned and move on. Let the banks and alike institutions drown in there own instruments as people wise up and stop using them *that will never happen I know but I can dream*.
Yikes! That is a tough situation, but I would say if they have a 73% LTV then they need to sell the house 🙂
Something else to consider – if this loan is in your name thenyou may have a hard time purchasing your own house (or car or even rent depending on how they look at your report and if your parents keep up on the loan). Are you sure of where you will be in 5 years?
Wow what a sad situation. There are a couple of things. It appears, financially stressed, that your parents have not asked for help, but you feel an obligation to help them. It also appears that even with 73% LTV your parents are reluctant to sell because a sale would pay the bank but not return your parents savings to them. Your parents have been reluctant to sell in the past and they are currently over leveraged at housing costs that are 4-5 times income. Usual ratio is 3 times income. Any of us could be in this situation whether we choose to help or not, we could certainly be asked and we could certainly feel obligated. I honestly feel that the first thing to realize is that you have no control over your parents. It is not likely that they will ever sell the house unless forced do by impending foreclosure. Human nature. Remove the pressure (which is the size of their current payment) and they won’t sell. Also you have no control over the real-estate market. During the S&L fiasco of the 1980s real estate valuations plummeted, developments went belly up, people found themselves upside down on their homes then as now. The important thing is that it took over a decade for valuations to begin to recover. You have no control over market recovery. My gut is that you should not help. In five years, you may meet someone and want to get married. What may seem like a good decision today because you are single may be a poor decision 5 years down the road. I hope you share with us what you choose to do.
TAKE CARE of your parents! They spent money raising you and brought you into this world. I am sure if you needed something they would help you out too.
It boils down to your relationship with them. If your relationship is like the Eminen’s (the rapper) maybe you should think twice. Otherwise do what you can!
Sit down and have a nice talk about it. There’s all this talk about not getting your money back but at least in the end you will own it. Don’t rent.
I wouldn’t hestitate to help my parent, but my own parents actually don’t need the help as is always the irony of these situations. The people most deserving of help usually never needs it.
That said, I think nost children owe their parents and should help if they can. The question is not so much if you should help, but how you should help. Is cosigning a new loan the best way? That’s really the question. I think the fundamental problem is the house is too big and too expensive. I agree with the sentinment, why throw good money after bad. I would say it might be better to suck it up now, sell the house for a loss, and then help your parents with attaining new more affordable housing.
I have an alternative solution, one which I’m actually looking into right now. I have the same situation with my parents, the only difference being that they have 1 child still at home, and 3 others that are 18-21.
I am thinking of telling them to just go bankrupt. As bad as it sounds, they don’t qualify for the mortgage forgiveness or refi plans, so it’s the best alternative. Instead of my paying down their mortgage so that they can refi and afford the payments, on a house that is worth about half of what it was when they bought it, I’m going to put that amount down on buying a new house. Since CA prices are so depressed, I can buy a house that is nicer than their current home, for less than they currently owe, and the mortgage payment will be half of what they’re paying now. They can then pay rent/the mortgage payment to me.
The big difference is that I own the house instead of them. Since they’ve got themselves into this kind of financial bind in the first place, I don’t really trust them to keep themselves out again. So for me, this is a good thing.
What do you guys think of this plan?
I agree with many other commentors here, especially Dave and Jim. I absolutely think you should NOT cosign, perhaps especially because cosigning with a 5/1 ARM does not even get them into a good loan that they will be able to keep. It just moves them from one shaky loan situation to another and drags you into the picture to boot.
I think people have a tendency to attach more emotional value to a house than is good for their finances. If I have understood your story correctly, this is a house they probably purchased fairly recently. It probably isn’t full of memories and sentimental value for them (or you). It’s just a very expensive place to live, right?
I definitely think it is honorable to help your parents if they need it, but we’re not talking about something truly important here like their health (which, given their age, is something it would be a good idea to have money in the bank for). It’s just a house. It’s an object.
It seems like both you and your parents would be better off in the long run letting the house go. If you really feel they deserve your help, there are other ways to do it that will be less harmful. For example, you could help them with rental payments for a year while they get back on their feet. Then you would be helping them get out of a bad situation without risking ruining your own situation.
The best way that you can help your parents is to wait until they lose the house. I know that sounds uncaring and that we currently live in a world with a bailout mentality, but it really is the best thing you can do for them. Losing the house is almost certainly be the only way they will ever move out of it. This house will eat them alive and you too.
Once they are out of the house you can help them find housing in line with their resources and aid them in their recovery. They may have to move a good little ways away. Their problem is not really a lack of money, but a lack of sound decision making.
This will be painful for them, but they won’t go cold or hungry.
i would rather give my folks some cash and help them get to a LTV ratio that lets them sell and realize a loss in the short term.
then they can get into a place they can afford and sometime between now and my inheritance i would hope to get the money back.
i would help them, but getting on board with the mortgage doesnt seem to be helping anyone.
Don’t do this, every good reason I can think of has already been said very well. The only thing I would try and point out even more clearly is the change in dynamic in your relationship. Imagine things are going poorly, they are needing monthly injections of cash now to make the payment. You have to help now, to meet the shortfall you are cutting your budget to the bone… However your mom just got her hair done and a brand new out fit. That feeling will kill your relationship.
You should “Help” your parents, buy them a copy of the “Total Money Make Over” or one of other good books. Share your mistakes and fears they have caused. Be a shoulder for your mom to cry on.
On the other hand Shame on your parents if they asked you for this type of help.
It’s sad to stay, but stories like this are popping up more and more. My folks are retiring in debt. Guess who won’t let them starve? There are a lot of ants who will soon be forced to deal with their grasshopper parents. Ten to twenty years down the road, we have a big problem on our hands.
People are harsh, what happened to be gentle. What is done is done, now what to do about it. You need to preserve your credit, but ask yourself this-what is the local economy like. If your parents live in California, Nevada, Arizona, Florida, Michigan, Indiana, or Ohio–forget about it–let it go into foreclosure you will be wasting your savings. If not you may have a chance if you co-sign a loan. If you do co-sign then you get the house, and they live in an apartment if you live in the same town.
Sigh, just had a shouting match with my parents. They refuse to declare bankruptcy or sell the house. My dad says he will get a second or third job if necessary, as they refuse to lose their downpayment. The thought of my parents working ridiculous hours into their 60’s and 70’s really makes me cry. Any other advice?
I think the shouting match more or less answered your question. You can only do so much. Though it’s admirable to want to help, clearly *you* see a critical problem, *you* don’t want them working ridiculous hours. But *they* don’t. Until they see it as a problem, sorry to say, you’re not going to be able to help.
Unfortunately, the downpayment is already lost. They just don’t know it.
your parents are willing to take on more jobs/work to pay down the house, are you?
I find it hard to believe they can’t find a fixed rate loan for less then 7% by themselves in current market conditions (if i remember correctly you said they never defaulted on any CC or loans, so they should have good credit)
I also am single, in my mid 20s and concerned I will have to take care of my parents financially. I have taken the first step in letting them know how I’d help them: they are always welcome to live in my basement.
looks like all other things have been said and over 80% of commenters are against you getting on the loan, I’m going to take side with them.
A couple of points:
1) CA is non-recourse for initial mortgage only. Gray area of refi’s is that traditionally lenders haven’t bothered to go after borrower’s for any additional money, but there is no guarantee in the future.
2) MossSF is right in that the downpayment is already gone. There was a quote in a recent economist that in parts of Texas, real estate is still 20% below the peak of the early 1980s when you look at inflation adjusted values. CA may end up being very similar, especially if they are in an area that is down 50% from the peak. It’s going to be longer than 5 years to get back to that high water mark, even in nominal values.
3) Sounds like they are probably in jumbo loan territory, which will make and modification program difficult. We recently refi’d our jumbo mortgage in the Bay Area, and some lenders (including Pen Fed) were requiring 2 independent appraisals and took the lower of the 2 as the value. Also, note the LTV limits at penfed and others for Jumbos. Penfed maxes @ 70% in CA, and many others max out at 75% LTV. If the loan balance is above $730K then you would be right on the edge of qualifying for the mortgage and if the appraisal comes in low, you’d have to come up w/ even more cash at closing.
From the sounds of it, you’re parents are stubborn and aren’t going to walk away until they are forced to by the bank. If they aren’t satisfied w/ walking away w/ 25% of the current equity from a sale, they are probably going to go down w/ the ship.
However, if they do have that much equity remaining, it could play out like this:
They are deliquent in payments, bank eventually starts foreclosure process. However, the value still may be above the loan value, at which point they may finally decide to sell and take whatever is left.
Good luck.
FinanciallyStressed, please take your parent’s stubborn reaction as evidence. YOU CAN NOT HELP THEM. They need to help themselves. As another person observed, THEY HAVE ALREADY LOST THEIR DOWNPAYMENT. The deflated housing bubble wiped it out. There will not be another housing bubble to make it magically appear again. Yes, it is painful to watch. I have been watching for 30 years. One bad choice after another. My mother was leasing a huge SUV for almost $600 per month!!! First mortgage. Second mortgage (fueled by the housing bubble). And her income is a fraction of mine. If you inject any money or good credit into the situation, you are guaranteed to go down with the Titanic eventually. I’ve had many sleepless nights trying to figure out how I can help my parents. The truth is I can not live their life for them. If I was independently wealthy, I would give them huge gifts of money with no strings attached. My parents sacrificed so much for me, I would not hesitate. Alas, I am not wealthy, so I can not throw money into a black hole. My parents said the same words, “we will never sell this house”. Well, that may be true. But the bank will eventually take it from you. And I will feel the pain alongside my parents, who are already in their 70’s. But stubbornness and bad choices are a horrible combination. Do NOT let your emotions rule this situation, or you will bankrupt yourself also. As another person suggested, keep yourself financially strong so that when really necessary you are there for them, be it a health situation, helping pay rent somewhere, buying food, or whatever. Not so that they can live in a house they can not afford. Spend time with your parents, buy them a sizable gift card during the holidays if you want to help financially. But do not let the guilt and emotions determine your actions and decisions. Best of luck to you.
Speculating in million$ homes in CA real estate? Not sure thats sound retirement planning for the broke.
“Family insurance” (as me & my siblings call it) is not about keeping others financially fit, its about helping keep someone sheltered & fed in the worst of times. Your healthy, well-paid parents are a long ways from needing this kind of help.
Financially stressed, I am sorry you had an heated argument with your parents. Please refrain from it as much you are implused to do it. Please use a concilatory tone. It is ok to disagree. You can suggest your options, they can put forward theirs. Set the tone that the intention is to help them. This might involve selling the house. Let them tell you what options they want to avail. Let them know if you can contribute to the ones that they put forward. If not, tell them you cannot help them. But there are other alternatives that you can support. Point out that they have to emotionally come to terms with the reality and let go of the attachment to the home as its clouding their judgement.
By all means help them but only if the plan is really to sell the house. If the plan is for you to co-sign and then try to keep the house it will not go well as there are a lot of financial headwinds against any real recovery soon (Green shoots or not). Use financial data such as the end of certain programs ($8000 credit) and the fact that foreclosures are still rising and going into prime markets now as well as the well known but much ignored commercial real estate mess that will keep the banks from opening their loans up to much for a good amount of time.
Ask them if its better to keep the house for a little longer and lose it anyway with no money taken out or to actually recover some money now and live more modestly in a house they can afford. Please explain to them their idea of keeping the house until the value goes back up to what it was is just not a realistic option as it will not happen for a very very long time and they will lose the house and more equity by then anyway. Get some facts and statistics behind you and show them housing is not about to recover.
My mother purchased a home at the perfect time in 1998 before the real estate bubble took off. She had a decent down payment and a very affordable mortgage. The value of her home went from $115k in 1998 to $220k in 2006. During this time, she was living beyond her means by racking up credit card debt. She lost her job and her income dropped. She could no longer afford the house. She sold it at a large profit and moved into an apartment. The revenue from the house sale was not enough to pay off her debt. One year later, she had to move out of that apartment into a smaller and cheaper apartment. She still has lots of credit card debt. I’d like to help, but I don’t want to throw good money after bad. My mom and your parents just need to learn how to manage finances better. Helping them now just gives them an excuse to continue their bad spending habits.
FinanciallyStressed,
I think the case is closed with your last comment. Your parents are telling you in an indirect way to “butt out!”, and you should. You have done all you can do. Tell them you love them and you are there for them in the future should they need any help (help that you are willing to do or can).
Have them read this blog if they haven’t already. Reading from others what you been asking them to do may be seen in a different light. (that is assuming they do not take offense that you posted there business on a blog).
Emotions are ruling this issue and as such you will harvest it’s byproducts. The fact that they are still trying to reach the pot of gold at the end of the rainbow tells me they are a long way from ready to truly deal with this problem. *The down payment is gone!* and so will be the rest of their lives if they keep on this mindset. It is hard for me to believe there are parents out there are acting like children. Such parents are in need of some real tough LOVE! *Remember? The kind usually reserved for us children*
Wake up America Bush needed fast cash to finance a War that promised great rewards from “black gold” oil and it back fired. Bush went “all in” and LOST now we are all paying for this loss as a nation. Lets do what we do best as Americans and get ourselves up and move forward and learn form the experience.
Sorry if I sound harsh but I am very angry that people in “power” have taken advantage of the good will and nature of the “common folk” and not only ruined many dreams but purposely deigned it to be this way. “what do powerful people call it?… Ah yes “COLLATERAL DAMAGE”. Cash for CLUNKERS seems to indicate that it is business as usual again. Hope most will be sober enough to see the TRAP! It is great deal for those that can afford it but this instrument is but a piece of a greater instrument sure to be presented to us soon. *I hope by this time those that participated in the Cash for Clunkers do not say ” Why did I ever get rid of my Clunker? Had I known this I would have never traded it”. Hope I am wrong on this but as I said before math is an exact science and permutations lead to business as usual + new things we will not like as a nation. Someone has to pay for all the bail outs and health care reform aka a forced insurance premium for terrible care *think car insurance but at last with car insurance on has the choice still to not drive and not be forced to pay car insurance, with health care it is just a creative way to make a new tax just like the cash for clunkers was a politically correct way to bail out the car industry.* In the end it is us “Tax Payers” who pay ti keep the powerful “POWERFUL”.
I am truly sorry that you and many others are having to deal with this but I do believe it is for the best in the long run, we will all emerge a stronger Nation; I believe so and maybe with some luck a sober nation as well ready to do what we do best be FREE instead of trapping ourselves in debt, addictions and the perpetual feeling of entitlement.
If there LTV is 73%, then they should either
1. Sell the house now and get out while they have some equity, or
2. Give the keys to the bank who will sell the house. With 23% equity in the house, the bank can probably sell it at or above the loan amount so your parents won’t have a deficiency judgment. Heck, they might put some money in their pocket.
The money they have in the property from their down payment is a sunk cost and is not to be used in the evaluation. Then they should rent and focus on building savings before buying another house.
Don’t co-sign.
Hi FinanciallyStressed,
You are definitely in a tough situation. I have worked in the collections field for over 20 years. One of the unfortunate things is most companies will not offer assistance to customers who are on time with their account. That is why most people who are struggling like your parents who probably deserve a loan modification won’t get one until they are 2 or more months late.
The best thing to do is work within the parameters that exist: your parents won’t sell, you should not co-sign for a loan (personally, I don’t think a lender will approve this loan because of current market conditions and the inherent risk), and your parents will probably not file for bankruptcy.
My suggestion is to tell your parents to stop paying on the house and put the money into their depleted savings. This will probably be the hardest thing to do which is to convince them to hold off on their payments. After a few months of missed payments, the collections department will offer a temporary or permanent loan modification based on your parents real income (not future 2nd or 3rd jobs).
The banks do not want to foreclose and will do anything to avoid it. (I have read there are people still in their homes and they have not made payments for over 18 months and no notice of default has been filed). As long as your parents remain current on the loan, they will not be offered any relief or financial assistance.
Once they miss some payments, your parents will have leverage to negotiate and gain access to the hidden company programs that are available to customers to help them get a better loan. All banks, loan companies, finance companies, and credit card companies have them and only offer them to delinquent customers. (Ironically, these programs won’t require any appraisals, points or extra fees).
I would also suggest that you get a power of attorney or letter of authorization to speak on their behalf to the bank or loan company. Being a 3rd party to the loan makes it easier to deal with the bank since you are not as emotionally tied into the property nor will you feel embarrassed or ashamed asking for assistance.
I personally have worked in the collections industry and have collected on real estate mortgages, auto loans , retail contracts and credit card charge offs. Every single company has a hardship program set up to help delinquent customers. The main reason why companies don’t help you when you are current is because they are still a company in the business of making a profit. These offers only come when they feel it is in the business’ best interest.
I hoped that helps you and gives you some insight.
Cheers!
CHESSNOID
Don’t co-sign!!! Here’s why:
–it will change your relationship with your parents
–if you get into this loan and they default, YOUR credit will be ruined
–they want an ARM loan?? Are you kidding me?? Didn’t they notice that ARM loans for people with crappy credit caused the foreclosure mess?
–you will resent your parents if they continue to live above their means as you watch financial disaster heading your way
–a person’s house payment should be no more than 25% of their total take home pay and no longer than 15 years (obviously with a low fixed interest rate) guessing whether you can “swing” house payments is a risky financial “plan”
–watch Dave Ramsey for a couple of weeks and you will totally change your opinion about co-signing. You can also watch Judge Judy–most cases revolve around co-signing and loaning money–the people, even family, end up hating each other because the loaner doesn’t get paid back and the loanee is annoyed that they are being harrassed to pay back the debt
DON’T DO IT DON’T DO IT DON’T DO IT
My gut feeling here is to say don’t co-sign. But I have a few other questions.
1. Is co-signing your idea or theirs?
2. How much is the shortfall and can you just help out your parents with cash till things improve?
3. Why isn’t it ok for your dad to get an additional job to ride out this market? Is it the problem that he would have to work the second job indefinitely? What if he did that for a year or two for the other foreclosed houses on their street to sell? Would that be ok?
4. Why do you think people shouldn’t work into their 60’s or 70’s? What would your parents’ retirement look like if they stopped working? While it’s a lot of work now, your parents are adults, not children and it’s ok if your father wants to work more unless he’s got some special medical reason that he shouldn’t. (I assume the answer is no, but you didn’t mention it.)
5. If you help them now, for whatever reason, are you really forestalling losing the house? (See #3, if your dad had a stroke and no income, they might still lose the house!)
6. If you co-sign *and go on the deed*, you will avoid probate if your parents pass away. That may actually be a good option for you, especially if you don’t have other siblings to make a fuss over inheritance. Is the plan for your folks to keep this house forever?
7. How does this house fit into your parents overall retirement plan? It sounds like they have no assets whatsoever and everything is tied into this house. Perhaps you need a bigger picture conversation with them. Even if they kept this house, rented it out to break even and they moved to cheaper housing, will they be able to save any other money? Just a thought b/c there may be a 2000 lb gorilla in the room here. I don’t know.
8. Do your parents have life insurance on one another? Perhaps if you look at the policy value, you’d find they need less money for retirement than you think once one of them passes on and there is a pay out. I don’t mean to be grim, but my parents have also undersaved for retirement, but there is enough of a payout on their policies that they’ll be ok as long as their savings doesn’t run out in the intervening years before one of them passes.
Don’t do it! You would only be hurting them in the long run and yourself. Don’t listen to these people that say you owe your parents help. THIS IS NOT HELPING! It is prolonging the pain.
Yes, I’m a Dave Ramsey graduate and I know he promotes only 15 year mortgages. As an investor I have had 15 year mortgages on rental property and I’m telling you in my area it isn’t worth the pressure even with rental income applied against it. I believe his approach is rather unrealistic for most people. He didn’t like debit card use for gasoline either when I took his course. Let’s get real.
When I compared a 15 year at 4.3% and a 30 year at 4.75
I think the difference in interest was minimal and the rest principle which I can pay anytime on a 30 year.
Take it from someone who’s pouring money into an account to pay 15 year mortgages off — talk is cheap. Run the numbers through a Bankrate.com mortgage calculator and look at the differences in these loans.
Real estate is a high stakes game. Having a partner when owning real estate is one way of minimizing risk to one individual. Your parents really should just work this out for themselves and if their judgment is to go down with the ship — let them learn that lesson.
My mother was diagnosed with terminal liver/colon cancer at Duke one day and when we began to look at the financial picture she had all of her wealth in a house (she then couldn’t borrow on more than her pension allowed) that was paid for and had 6 credit cards in her wallet. Also she owed money on those cards and was making a car payment.
As someone who has had to help out my parents numerous times, I would say don’t co-sign on the loan. It may be better to go ahead and let the house go into foreclosure and then they can rent a more affordable place which will allow them to save money.
I wish you the best of luck. I know how hard it is trying to make the right decision. You want to do it all but you have to remember, you have to take care of yourself first. After all, if you have problems, who can you depend on?
– SingleGuyMoney
Hi again,
I thought this recent CNN.Money article could shed some light. This California person lived in his house for 18 months without payment before vacating the house. This demonstrates banks trying to avoid foreclosures and realizing their true losses (it is estimated that each foreclosure cost banks between average $50-70,000).
http://money.cnn.com/galleries/2009/real_estate/0908/gallery.Life_after_foreclosure/3.html
Even before he left, the bank or its collections department was still offering him options to try to keep him in the house, although none were acceptable to him.
More than likely this person was offered different modifications that included principal and interest rate reductions. You and your parents can probably obtain what you are looking for without refinancing or co-signing for a new loan through one of the programs that the bank’s collections department offer (which are not available until they are delinquent).
Hope this helps.
Cheers!
CHESSNOID
helping your parents means encouraging them to sell quickly and move into the smallest thing available until their finances are in order. take a loss, bring cash to closing, whatever. teaching them to be responsible is tough but don’t do it at your own expense.
I’ve been on vacation and it took me a while to approve some comments, I just wanted to point that out so readers don’t miss anything, there were some long and good comments. I read a lot of good perspectives, I think when it comes to family and money there are no cut-and-dry answers.
Good luck, FinanciallyStressed! Hopefully, we can do a positive follow-up in the future.
Lastly I think you need to re – read Daves comments near the top of this page, he is bang on !!
I think this type of arrangement, kids helping their parents, can work in certain situations. Yours isn’t one of them. If your parents were open to accepting help from you, you wouldn’t have been in a shouting match with them.
If something changes in the future, I recommend that all parties sit down with an attorney to draft an agreement that addresses everybody’s intentions of how things should go in every possible outcome (FMV of house goes up, FMV goes down. Parents making payments, parents not making payments. How to cash you out. What to do in 5 years when the ARM resets. Who has the right to force a sale, etc., etc., etc.)
That way, nobody’s feelings get hurt if things don’t turn out as planned (FMV goes down, parent’s can’t keep paying… now what? Consult your agreement, that’s what!).
Refinancing is only a good decision only if you plan to stay in the home more than 5 years. There is no guarantee she will get a low interest before the ARM matures. Thats how people got stuck with those subprime loans… If would not co-sighn unless i was physically living there being able to monitar the bills.
She can get a roomate if she has at least 4/ br house.
Bottom line. No parent should put that kind of burden on a child. I would ask my child to move in to help with bill but i would never ask them to become a legal responsible party….The bible says store up treasures for your childrens children
Sound advice has been given here, some not, the main thing I try to see for myself or anyone else is to gather all pertinent information you can and present it and see the facts for all involved. Every ones situation is different, one thing that remains constant in this economy is that things are tough all over. I can offer you some options and information at my web site, some good articles that relate directly to your situation and many others. I have a large network of certified buyers and give a free no obligation quote, that would allow anyone to see what there cash options are.
What ever happend to his situation?….did he do something to save their home or did they just go bankrupt????
I need help….i am currently in the same situation as he was, my mom cannot work and my dad recently got fired. Im the only one that works in the house hold.
Is there any way i can help them to save our home???
My husband and I seperated 3 years ago. . He left me with a 7 year old little girl and I had just been laid off by my employer. I managed to get a job but not making anywhere near what i used too. . The ex doesn’teven call to see if our daughter is alive. Never visits her. His parents doesn’t contact her either. Well, this past September I lost my job of four years. It took me a month to find another job. . I got behind in my payments and now default is near. I was going to get back way over enough on my federal taxes to catch up my payment. Filed my taxes. The next morning the accountant called and said my claim has been denyed because my daughter had already been claimed. I gota hold of my ex and he said he claimed her. He committed a federal offense, the child must live with the parent 6 months. . He hasn’t visited in three years. I am reporting fraud and taking him to child support court. But i will lose the house by the time I can appeal the Irs. The ex cost me 5 k and i needed it yesterday. . Any ideas? I need help.