Health and Money Woes Cloud Retirement

Dear Debt Adviser,

How do I retire if I can't pay off my home? I am almost 63 years old. My health is becoming questionable, and I am only working for insurance and enough money to pay the mortgages on two homes. I acquired a foreclosed home in Florida on which there is a $31,000 mortgage. I also have a home in Illinois with a $140,000 mortgage. I have tried to sell my home in Illinois and now realize that it's underwater. If my health deteriorates and I must retire, what is the best way to keep the Florida home and eliminate the mortgage in Illinois? I will only have about $2,000 a month in net income from Social Security and a retirement plan.

-- Joe

Dear Joe,

I wish you had asked yourself this question a lot earlier than now. So many people think they will never retire or that retirement is way off in the future. Then one day they wake up and they are 63 years old and in poor health. However, despite your poor planning there may be options to get your Illinois mortgage off the books in the next year or so. Let's begin.

Because you purchased a home in Florida, I am going to assume you have decided that is where you are going to retire. Given that, I recommend that you begin looking for employment in Florida now. It will be important for you to find work while you are physically able. If you are planning to live in Florida anyway, you might as well go ahead and make the move. It would be ideal to secure employment in Florida beforehand.

Second, contact a real estate professional in Illinois to determine what you can realistically expect to sell your home for. You need to know just how much of a deficit (the difference in what your home will sell for and what you owe on the mortgage) you will face from selling your home. An alternative to selling in a down market is to lease your home. Discuss this with the real estate professional, too. As long as you could cover the costs of the mortgage, insurance and any fee for the person who handles things such as maintenance and rent collection, you might be able to buy some time until the housing market improves. You may also net some tax benefits from being a landlord.

In Florida, contact a housing counseling agency approved by the Department of Housing and Urban Development. Explore primary residency requirements and whether a reverse mortgage would be a good fit for you. Unless you own a trailer, with only a $31,000 mortgage you should have enough equity in your Florida home to make your mortgage there go away. Plus, you may have some money left over to cover all or part of the deficiency on your Illinois home -- if you are inclined to repay it -- or help supplement your monthly income.

Similarly, I want you to start looking at your options with a HUD-certified counselor in Illinois. Some options you want to ask about include a short sale, in which the bank agrees to let you sell the home for less than the amount owed on the mortgage, or a deed in lieu of foreclosure, where you surrender the property to the lender in exchange for being released from the mortgage. Other options to discuss include walking away and mailing the keys back to the lender.

The bank may be accommodating. A short sale, for instance, can provide less of a loss for them than foreclosing on the home. Typically, first mortgage holders don't pursue deficiencies after a short sale. But there are no guarantees of that. So I suggest you get a legal opinion in each state of what the consequences of defaulting on your mortgage would be. If the lender forgives the deficiency on the Illinois home, the amount forgiven would typically become taxable income for you. However, depending on your circumstances, the Mortgage Debt Forgiveness Act may protect you from having to pay income taxes on forgiven mortgage debt.