It is a huge problem when your primary home is more expensive than you can afford. Here in San Diego, many rentals are less expensive than mortgages. This has been true for decades–the rental market has trailed the mortgage market by about $500-$1,000 per month since the late 1980′s, when you take taxes and insurance into account. If you are an investor, you find (the moment you consider a purchase) that leverage only works for you up to about 75% of the property’s value, and if you get a piece of property to “break-even,” it’s going to cost you 25% of the price to make that happen. At today’s rates, you can borrow the rest, and still have a break-even. Of course, this is only part of the story, because the mortgage interest deduction generally gives you back the extra you spend keeping your house. However, some people just cannot make it, and have to sell. If you are among those, here is some advice (Please note: the decision to accept a foreclosure, short sale, or modification may have serious tax consequences; please consult an appropriate professional regarding your choices):
If you “walk away,” you can probably delay having to move for about a year. Sometimes it happens quicker, but most often the lenders are not super-aggressive with their delinquent loans. They really DO NOT want the property back. However, this option can ruin your credit for up to 10 (that’s right!) years. Even though the current wisdom says 4-5 years, I have been involved in lending for many years, and it really does take longer, if you want a loan you can live with. The problem with this option is that the repurchase cycle is so long–long enough so that property values have a good chance to rise again before you can repurchase. So you will be “cursed” with buying property at the height of the market–again. a “Deed in lieu” is about the same as a foreclosure in its long-term effect on your credit.
If you short-sell, you can be in your new home shortly. The lenders are treating short-sellers somewhat differently than folks who just walk away, and that often means a couple years waiting to purchase, if that. I saw one situation last year where the short-sale took place, and the seller (now the buyer) was in escrow on a much less expensive house by the time the escrow on the house he was selling closed. I was not involved in that transaction as a seller’s agent, so I don’t know what that took, and it may have been a unique circumstance.
Go to the Federal website to see if you qualify for a modification first. that site is here: http://makinghomeaffordable.gov/ They are not very efficient, and often don’t provide the help they promise (their current level of modifications is about 2%, based on the number of delinquent loans in the US), but people do qualify for this. If you do not, contact your lender. At present, lenders have not yet “come to the party,” and many homeowners and investors are still unable to obtain modifications.
The problem, of course, with both these solutions is that neither the Federal Govt nor the institutional lenders want to reduce the principal balance on these loans, which would bring the property values to par with the current values. This would be the best solution, and has been proven to work in many instances. There are private entities that are doing this, but so far there is no statistical evidence to determine how well it’s working.
Be careful with loan modification companies. More real estate licenses have been revoked over this in 2009 than for any other violation, and 2010 will probably see the same level of revocation for attorney’s licenses–in times when people are hurting, the unscrupulous abound. Hereare some sites you can visit which may be of help if you decide to seek a modification:
http://www.occ.treas.gov/ftp/ADVISORY/2009-1.pdf
http://www.dre.ca.gov/pdf_docs/FAQ-LoanMod.pdf
http://www.marketwatch.com/story/cant-pay-mortgage-some-modification-offers
Because of the immense amount of fraud in the loan modification industry, the Feds have created the “Financial Fraud Enforcement Task Force,” which targets all types of mortgage scams:
http://www.justice.gov/opa/pr/2009/November/09-opa-1243.html
The first site is the Treasury site, and the second site is the California site. In addition, most of the major news outlets have stories on this, and you can access them via their websites.
