Wikipedia defines “A promissory note as a legal instrument (more particularly, a financial instrument), in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.”
I bring this up due to numerous conversations with prior, current and potential homeowners, who function under the mistaken belief that their obligation to repay their full mortgage balance has any basis whatsoever on current real estate values. You will not find a disclaimer in a Promissory Note that relieves you of your obligation to repay the loan should the collateral not retain or increase in value. In fact, VA loans specifically require that you sign a counseling checklist that reads in part: “although real estate values have historically risen in most areas, there is no assurance that the property for which you are seeking financing will increase in value or even retain its present value”. It goes on to outline what will happen to a Borrower who chooses not to honor their commitment when using their VA benefits to purchase a home.
Although other loan products may not provide an itemized list of ramifications to those who don’t honor their commitment, they remain the same; your credit will be impacted, your ability to obtain future credit will be affected, any debt not repaid may be sent to collection and/or claimed as income with the IRS…and the list goes on. Bottom line, there are negative consequences for such a choice.
When one chooses to purchase a home and does so with borrowed funds, a commitment is made to the Lender who extended credit in good faith trusting that the obligation to repay those funds would occur regardless of what transpired; be it life circumstances, economic down turn or a change in market value, whether positive or negative. Should someone choose not to fulfill this commitment there should be ramifications – and those ramifications should be negative. There exists today, safety nets for true “hardship” cases, as those have always and will always exist, but trust me when I say that a lot of what we see and hear about are not “hardship” cases. They are the result of conscious decisions to not fulfill ones commitment because the investment they made does not “currently” meet their expectation whether due to market value or property location or some other reason, and they are not “willing” to wait for the market to come back or to pay the difference necessary to fulfill their financial obligation should they sell without realizing enough net proceeds to cover the balance due.
More times than not these same people who chose to walk away from their prior financial commitment still believe in and want homeownership and they look to the same financial institutions that suffered a loss as a result of their choice to “take a risk” and lend to them again. One has to ask themselves, “If I was a Lender would I consider myself to be a good risk knowing that I didn’t honor my prior commitment?” And would I lend sufficient funds to buy a house knowing that history? Probably not!
So where does this leave us? What do you see as the impact of such choices? What are your thoughts, should someone who chose to walk away from their last mortgage due to a down turn in the market, not a hardship, be given the privilege of obtaining a mortgage to purchase a new home in the near future? What do you feel should be done to mitigate future losses?
Share your thoughts!
The image and definition of a promissory note are from Wikipedia.com