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I'm currently looking into the idea of buying a multi-family home in Brooklyn via an FHA loan. FHA loans seemed like they could take some of the risk away of putting down 20% (i.e. a high % of all my money) leveraged 5x on one illiquid bet in exchange for paying PMI and higher closing costs.

So, I'm wondering if that's actually the case. What happens if I lose my job, the rent roll can't cover the mortgage+repairs, all my due diligence fails stupendously, and it seems destined to be a long term loser. Can I walk away with just losing my closing costs and a credit hit for 3 years?

OR - since New York is a recourse state - can they sue to garnish wages/assets to make up the difference between sale price and amount left on the loan? Can they do that even if the foreclosure sells above the prevailing market price but still under the amount left on the loan?

EDIT: I read somewhere that NY is a one option state - meaning the lender either has to accept a foreclosure or can garnish wages/assets to keep paying the mortgage. If that's true, then am I right in thinking they can and will just simply opt to take my wages and assets indefinitely since they know I have both?

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Don't know about New York, but in Australia almost all our home loans are full recourse (except for limited circumstances). So if the bank sells your home and gets less than the amount owing on the mortgage, then the borrower still has to keep paying the balance to the bank until it is fully paid off. –  Victor Mar 12 at 3:51
    
By the way, foreclosure stays on your credit for way longer than 3 years. IIRC its 7 or 10 years. –  littleadv Mar 12 at 7:30
    
You say "What happens if I lose my job, the rent roll can't cover the mortgage" and later "simply opt to take my wages and assets indefinitely since they know I have both". Those appear to contradict. Are you considering the case where you can't afford the mortgage because of job loss, or some other case? –  DJClayworth Mar 12 at 13:12

3 Answers 3

According to the Trulia reference on the issue, New York is a recourse state.

Recourse means that the lender can go after you for the difference between the foreclosure discharge amount (in New York - the higher of the FMV or the actual sale price) and the debt balance. That includes garnishing your wages, seizing your assets, and any other method of collecting the judgement. The relevant law is in the New York Consolidated Laws - RPA Article 13.

The option you're talking about is the option any lender has anywhere - not to sue you for the difference (provision 3 of the paragraph):

If no motion for a deficiency judgment shall be made as herein
prescribed the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.

So if during the foreclosure they didn't sue you for the difference - they cannot change their mind after that.

If you're not sure you can repay the loan - you should probably walk away from the deal.

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+1 for this: If you're not sure you can repay the loan - you should probably walk away from the deal. –  Pete Belford Mar 12 at 13:43

Nearly every state in the US is full-recourse.

If one doesn't seek bankruptcy protection, creditors can seek judgement, and collect assets.

Foreclosures frequently sell for approximately half the market price.

Considering unemployment risk, homes can be risky. A far better way to accumulate wealth is with equities (stocks). However, the risk converts from insolvency to liquidation since during times of high unemployment, equities are also cheap, causing any liquidation used to fund current expenses to be potentially ruinous.

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recourse is usually given for the difference between the debt balance and the FMV, not the actual sale price (unless its higher than the FMV). See the links in my answer. –  littleadv Mar 12 at 7:29

One additional penalty is you will be put on the CAIVRS ("cavers") for your default on the FHA mortgage which will preclude you from FHA financing in the future.

When purchasing the multifamily unit it is an FHA requirement that you occupy one of the units.

Lastly, I would advise against FHA due to elevated costs. Conventional options have 95% financing options, and don't have mortgage insurance that lasts forever, like FHA does.

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Hmm... my lender told me I could not get a conventional loan on a multi-family for less than 20% down. –  Fluffies Mar 12 at 22:41

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