can banks come after your assets if you walk away from a 2 mill+ mortgage?

[FCP]

Hello all,

 

I am 2 years out of training.  I have a near 2 million dollar net worth.  I previously posted here about buying a home for over 3 million.  I was convinced by the wise posters on this board to hold on buying such a home this year.  I decided to wait until at least 1 year from now (if not longer).  However, I am now thinking...maybe I should be even more conservative about this, and wait until I have enough cash in my brokerage account to pay off the mortgage in full + still have 1 million left over if I had to (ie wait until my brokerage account is at 4 or 5 million).  Please let me know if I am wrong about this...(and I think the answers to the scenario below should be useful for anyone on this board)...

 

Currently, if I were to lose the ability to work but unable to obtain disability insurance (ie if I lost my medical license or something terrible like that), I would be set for life.  I have 7 figures in a brokerage account, enough in my retirement accounts to have multiple millions in those accounts by age 65 (if the market continues to grow at the same pace it has for the past 80 years), multiple rental properties (can sell one of them and live in it permanently), etc.

 

However, if I bought a 3 or 4 million dollar house, and something terrible happened to me where I couldn't work, in the best case scenario, I'd sell the house and maybe lose some equity (or...maybe lose the entirety of the 20% down payment), but I'd still have all of my other assets, retirement accts, and 7 figure brokerage account intact to live off of for life.  However, given that these types of houses are harder to sell than those at the 200-300k mark, what happens if I buy a 4 million dollar house, but can only sell it (worst case scenario) for something like 1.5 or 2 million (in the event of a terrible real estate crash)?  If such a scenario happened, ideally I'd just walk away from the house and say goodbye downpayment/equity, pay off one of my rental properties, live in that, and live off my 4% withdrawals from my 7 figure brokerage account.

However, a very non ideal scenario would be if the bank was able to sue me and seize my entire brokerage account + all of my other assets to make up for the 2+ million dollar loss from selling a once 4 million dollar house for 1.5 or 2 million. My question is: can a bank legally do that?  If so, then I think buying such a house, without the means to pay for it in cash + still have 7 figures left over, would be completely idiotic, as I'd be put in a worse position financially than I am in now.

 

Hopefully all of that made sense.

[q-school]

too hard to resist the urge, so i will just (be the first) to offer that you should not buy the house until you can afford it.  you are doing great, why risk it?

 

[CordMcNally]

The bank can (and will) come after somebody with those kinds of assets. And they should.

[FCP]

q-school wrote:

too hard to resist the urge, so i will just (be the first) to offer that you should not buy the house until you can afford it.  you are doing great, why risk it?

 

Click to expand...

So, I for sure am not going to buy anything like this within the next year.  I was thinking maybe once I have at least 1.5 million in a brokerage account, that I'd consider it.  However, after thinking of ultra worst case scenarios, I am trying to figure out if even having 1.5 million in a brokerage account when buying a place like this is still too risky, and whether to be more conservative (ie having 4-5 million) so that I have enough in liquid assets to not only cover the mortgage in such a scenario but also cover my expenses for life.

I guess I am posting this because I don't think I've ever been advised (here or elsewhere, except for maybe on Dave Ramseys site) to either pay for a house in cash or have enough liquid assets to pay for a house in cash.  Generally, the advice I heard from WCI was 1) pay off your loans, 2) save 20% for retirement, 3) live like a resident for 2-5 yrs, and 4) only take out a loan for a dream home once these things are done.  I have done 1-3, but I think for situations involving higher dollar mortgages and having assets worth multiple millions, this advice would need to be tailored differently to avoid/minimize catastrophe.

[CordMcNally]

FCP wrote:

Generally, the advice I heard from WCI was 1) pay off your loans, 2) save 20% for retirement, 3) live like a resident for 2-5 yrs, and 4) only take out a loan for a dream home once these things are done. I have done 1-3, but I think for situations involving higher dollar mortgages and having assets worth multiple millions, this advice would need to be tailored differently to avoid/minimize catastrophe.

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You should have disability insurance that can cover your expenses until 65. If you aren't able to obtain proper disability insurance then you would need to alter your plans. There's no need to tailor this advice if you buy a home you can "afford".

[Zaphod]

It depends on the specifics of your state laws regarding foreclosure. In some cases yes and others no.

Whether the bank can or should come after people in these situations is a moral argument that makes no sense. A mortgage is a contract only and thats all that matters, further its backed by an asset. Businesses do this all the time, dont fall for the personalizing of it and making it some moral issue, thats how we got to where we are today in the first place. Also, no one, absolutely no one forecloses and walks away more than large business and banks themselves.

[Hank]

Is it a recourse loan or a non-recourse loan?  Depending on state law and the terms of your mortgage or deed of trust, the bank may or may not have recourse beyond any equity in the house.

In Arizona during the 2008 real estate crash, most loans were non-recourse.  Foolishly, most were non-recourse even if they weren't loans for a primary residence.  It's one thing if a construction worker married to a bank loan officer both found themselves out of work during a housing crunch and couldn't afford the note on their home.  It's quite another to protect speculators who had 10 or 12 properties they were planning to flip on a "greater fool" theory.

Don't buy more house than you can afford.  Bigger, pricier houses cost more to heat, cool, insure, repair, sell, etc.  You get a tonier group of Joneses to keep up with and your kids will be disappointed if you "only" go skiing in Park City or Vail instead of the French or Swiss Alps.

[FCP]

CordMcNally wrote:

FCP wrote:

Generally, the advice I heard from WCI was 1) pay off your loans, 2) save 20% for retirement, 3) live like a resident for 2-5 yrs, and 4) only take out a loan for a dream home once these things are done. I have done 1-3, but I think for situations involving higher dollar mortgages and having assets worth multiple millions, this advice would need to be tailored differently to avoid/minimize catastrophe.

Click to expand…

You should have disability insurance that can cover your expenses until 65. If you aren’t able to obtain proper disability insurance then you would need to alter your plans. There’s no need to tailor this advice if you buy a home you can “afford”.

So, the hypothetical worst case situation I am talking about is if I can't use disability insurance (ie if I lost my medical license or some other terrible thing happened where I assume I wouldn't be able to get disability coverage).

[CordMcNally]

FCP wrote:

CordMcNally wrote:

FCP wrote:

Generally, the advice I heard from WCI was 1) pay off your loans, 2) save 20% for retirement, 3) live like a resident for 2-5 yrs, and 4) only take out a loan for a dream home once these things are done. I have done 1-3, but I think for situations involving higher dollar mortgages and having assets worth multiple millions, this advice would need to be tailored differently to avoid/minimize catastrophe.

Click to expand…

You should have disability insurance that can cover your expenses until 65. If you aren’t able to obtain proper disability insurance then you would need to alter your plans. There’s no need to tailor this advice if you buy a home you can “afford”.

So, the hypothetical worst case situation I am talking about is if I can’t use disability insurance (ie if I lost my medical license or some other terrible thing happened where I assume I wouldn’t be able to get disability coverage).

Click to expand...

Do you have disability insurance now? If not, that's your problem.

[FCP]

CordMcNally wrote:

FCP wrote:

CordMcNally wrote:

FCP wrote:

Generally, the advice I heard from WCI was 1) pay off your loans, 2) save 20% for retirement, 3) live like a resident for 2-5 yrs, and 4) only take out a loan for a dream home once these things are done. I have done 1-3, but I think for situations involving higher dollar mortgages and having assets worth multiple millions, this advice would need to be tailored differently to avoid/minimize catastrophe.

Click to expand…

You should have disability insurance that can cover your expenses until 65. If you aren’t able to obtain proper disability insurance then you would need to alter your plans. There’s no need to tailor this advice if you buy a home you can “afford”.

So, the hypothetical worst case situation I am talking about is if I can’t use disability insurance (ie if I lost my medical license or some other terrible thing happened where I assume I wouldn’t be able to get disability coverage).

Click to expand…

Do you have disability insurance now? If not, that’s your problem.

Click to expand...

Yep I have disability insurance.  I assume that would not cover loss of medical license.  Or...does it?  I have guardian/berkshire.  (side note: my license is fine but I just want to protect against all possible scenarios).

 

[Faithful Steward]

FCP wrote:

I assume that would not cover loss of medical license.

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You are correct.

[CordMcNally]

FCP wrote:

Yep I have disability insurance. I assume that would not cover loss of medical license. Or…does it? I have guardian/berkshire. (side note: my license is fine but I just want to protect against all possible scenarios).

Click to expand...

Do you have a legitimate reason on why you think you may lose your medical license? As long as you aren't Dr. Death or running a cash for pills practice then I think the chance of completely losing a medical license isn't something that I would necessarily waste my time thinking about.

[ajm184]

FCP wrote:

I just want to protect against all possible scenarios

Click to expand...

You can insure against certain risks (life, house, disability, medical malpractice).  There is not an insurance policy protecting one legally from knowingly stupid decisions.  Practicing good medicine and otherwise being a good law abiding citizen is your best and only defense.   You see physicians at times being accused of some pretty bad behavior, yet the punishment from state licensing boards is really tame IMO (relative to the alleged crimes).   Depending upon the State of license cross-border enforcement is weak or non-existent.

[Lordosis]

Not that I am saying you should buy a multi million dollar house but what are the chances of you loosing your license during a major housing crash?  If you buy a 2M home and it is in an area where the average home is 1.5M you should be able to sell it if you get in trouble.

If you buy a 2M home in my town it would be a 10K sqft mansion on the lake with 20 private acres.   Affording and maintaining this would be at enormous cost and if you needed to sell it might take years.

[FCP]

CordMcNally wrote:

FCP wrote:

Yep I have disability insurance. I assume that would not cover loss of medical license. Or…does it? I have guardian/berkshire. (side note: my license is fine but I just want to protect against all possible scenarios).

Click to expand…

Do you have a legitimate reason on why you think you may lose your medical license? As long as you aren’t Dr. Death or running a cash for pills practice then I think the chance of completely losing a medical license isn’t something that I would necessarily waste my time thinking about.

Click to expand...

ajm184 wrote:

FCP wrote:

I just want to protect against all possible scenarios 

Click to expand…

You can insure against certain risks (life, house, disability, medical malpractice).  There is not an insurance policy protecting one legally from knowingly stupid decisions.  Practicing good medicine and otherwise being a good law abiding citizen is your best and only defense.   You see physicians at times being accused of some pretty bad behavior, yet the punishment from state licensing boards is really tame IMO (relative to the alleged crimes).   Depending upon the State of license cross-border enforcement is weak or non-existent.

Click to expand...

Lordosis wrote:

Reply Content:

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Thank you for all of your replies.  No, I don't have any concern that I may lose my license, but as my practice grows, and the volume of patients running through it grows (especially with nurse practitioners underneath me and my involvement in every detail of their patient encounters lessening), I can't help but think about all possible worst case scenarios, ie if a nurse practitioner screws up by prescribing something incorrectly despite me giving correct instructions, an adverse event occurring, I get found to be at fault, and somehow that translates to me losing my license.