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Posts Tagged ‘negative equity’

Should I Do a Short Sale, Deed In Lieu of Foreclosure, or File Bankruptcy?

Question: I Live in Las Vegas. I Owe $300,000 on a House that is Valued at $150,000 and Dropping. What Would be the Best Alternative For Me? Should I Do a Short Sale, Deed In Lieu of Foreclosure, or File Bankruptcy? At Present I am Unemployed and Can Not Afford the Payments and HOA. I Have Good Credit and Want to Protect It.

Answer: You asked for the “best” alternative considering your negative equity situation with your home, yet you also indicated that you want to protect your credit rating. Unfortunately, these two goals are simply not possible to achieve simultaneously given the circumstances you’ve described. If you do a short sale, a deed in lieu of foreclosure, or file for bankruptcy protection, all of these options will severely damage your credit. In fact, since you currently have good credit, you are likely to experience a drop of about 100 points or more in your FICO credit scores if you pursue any of those avenues. The good news is that the credit scoring universe is far more forgiving than you might imagine. You can rebound after a serious credit setback and begin to rebuild credit in about a year or so.

Bankruptcy Not Advisable In Your Case

If you were not so deep under water, and if you were currently working, a Chapter 13 bankruptcy filing would allow you to keep your home. However, in light of the information that you disclosed, particularly the fact that you can’t afford the house and the payments to your homeowner’s association, I do not see the value of filing for bankruptcy protection in your case. It does not sound as if you are committed to or even particularly desirous of keeping a home that is in such a negative equity position. If you did file bankruptcy to save the home for some reason or perhaps to reduce other debts (though you didn’t mention any), it may just be a predecessor to a foreclosure, in which case you’d have two serious marks against you in your credit file.

A Deed In Lieu of Foreclosure Appears to Be the Best Option

A short sale may or a deed in lieu of foreclosure are better options. But the truth of the matter is that a deed in lieu of foreclosure may be your only feasible solution because, as you stated, you are living in “Lost Wages,” the epicenter of the foreclosure universe (along with Miami, FL). There’s stiff competition among underwater Las Vegas homeowners to sell their properties to buyers interested in purchasing homes via a short sale. With so much housing inventory on the market, if you want to get out of the house as quickly as possible, and likely do the least amount of damage to your credit rating, the fastest method of getting this problem situation behind you is a deed in lieu of foreclosure.

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My Husband and I are Underwater on Our Lovely Historic 1930 Era Home, Which We Hoped to Grow Old In. We Paid $783,000 for it Back in 2005, When We had a Six Figure Income as a Couple and Could Afford It. Our Home is Now Worth About $500,000. What Do We Do?

Author: The Money Coach

Q: My Husband and I are Underwater on Our Lovely Historic 1930 Era Home, Which We Hoped to Grow Old In. We Paid $783,000 for it Back in 2005, When We had a Six Figure Income as a Couple and Could Afford It. Our Home is Now Worth About $500,000. What Do We Do?

A: You are in a very, very tough and complex situation because based on everything you’ve said to me, here are the facts:
•   Your husband has been put of work since March 2008 and receives his last unemployment check (after four extensions) this month.
•   You’ve repeatedly sought a loan modification, since December 2008, from your lender but have been consistently rejected because you are current with your payments
•   You’ve already depleted your savings from $25,000 to about $9,000
•   You have roughly $25,000 in credit card debt
•   You’ve been advised by a lawyer and a loan modification company to stop making payments, attempt a short sale, and if that fails file bankruptcy or go into foreclosure
•   You cherish your home and neighborhood and really don’t want to leave there
•   You and your husband both have very good credit scores in the 700s. Your credit score is 762, and you want to maintain a good credit rating

The Perfect Storm

It sounds like you and your husband have been caught in the middle a “perfect storm” financially speaking. Not only are you seriously underwater in your home – as are 1 out of 4 homeowners nationwide – but you are also grappling with a serious loss of income, due to your husband being out of work for nearly two years. Moreover, the credit card bills are mounting and the savings you’ve amassed are quickly dwindling.

Obviously, you have been able to hang on until now, using your individual job earnings and your collective savings as a way to stay afloat. But I recognize that you’re in desperate need of a life jacket – and soon.

Tough Choices Ahead

You did not say how old you are, but you did indicate that you would have liked to “grow old” in your current house. So I sense not only how passionately you love your home, but also your willingness to stay put for many more decades. If that it the case, then you have to make some difficult choices. The first is whether or not you’re willing to sacrifice your credit rating in the short term, in order to achieve a long-term objective, namely saving your home. Currently, your mortgage balance appears to exceed the value of your home by 50% or more. Realistically speaking, it could be another 10 or 20 years before your home regains it value. Who knows? This makes any potential sale highly unlikely – at least without doing damage to your credit report, as a short-sale will definitely do. A short-sale, foreclosure, or a deed-in-lieu-of-foreclosure are all treated the same for the purposes of your credit rating. They are major negative events that will cause a triple-digit decline in your FICO credit scores.

But in my opinion, a short sale is not the best option for you – certainly not at this time. Because your home is so deeply underwater, you may have difficulty finding a buyer. And even if you do, it’s likely that you lender will balk at agreeing to such a low price. No matter what the market value of the home really is, the bank may reject your short sale deal because it may result in a potential loss of a few hundred thousand dollars for your lender.

Don’t Succumb to a Short-Sale, Foreclosure or Bankruptcy

As I said, however, it’s a little premature for a short-sale – primarily because you adore your home, you want to stay in your neighborhood, and you have actually been able to make the payments (as hard as that’s been).

Given all of your circumstances, I do think the attorney and the loan modification company were correct about one thing: if you really want to get your loan adjusted, unfortunately you will have to miss payments. Yes, this will cause damage to your credit rating. But the damage of having a 90-day late payment on your home will be a single, isolated event. It will be far less harmful than bankruptcy (which will stay on your credit report for 10 years) or foreclosure, which will also haunt you for seven years, and means that you’ve lost the home you treasured.

Contain the Fallout to Late Mortgage Payments

Instead of bankruptcy, foreclosure or a short sale, try to contain the damage to just being 90-days late on your mortgage. Keep up those credit card payments; even if you’re only making minimum payments, and you will be able to rebound, from a credit standpoint, from the late mortgage payments. It’s a kooky system we’re dealing with now. But the sad truth is that so many homeowners are struggling with payments that banks are “prioritizing” and only offering help to the “neediest” of borrowers – i.e. those that are already behind of their home payments. Ironically, although you and your husband are trying to be responsible and do the right thing by staying current, your fiscally responsible behavior is the very thing standing in the way of you getting a loan modification.

Ask for a Trial Modification

So the bottom line is this: I hate to have to offer this recommendation, but if you really want to stay in the home, or even just buy your family a bit of time until your husband can get a replacement job, then you should first find out all the details you can about your lender’s home loan modification program. Get all the paperwork, applications, and other forms you can – even ahead of actually missing a payment. Once you are late on your mortgage, many lenders offer you the opportunity to go through a “trial” modification period. That’s where you make reduced payments – usually for three or six months in a row – to show the bank that you can afford the modified mortgage amount.

Again, I know this isn’t an ideal situation. But in your situation, you can not achieve all the objectives you want simultaneously. Think about the long-term. If you truly want to stay in the home, and if you and your husband can afford it with a modified mortgage, then don’t be so stressed by the fact that the home is underwater. After all, if things work out, then your equity “loss” really mainly matters on paper, because you’ll never sell that home you love so much anyway – not now, and not in the future.

I am a U.S. Army Veteran Having Trouble Refinancing My Home What Can I Do?

Author: The Money Coach

Q: I am a U.S. Army Veteran Having Trouble Refinancing a Home I Purchased Over 3 Years Ago. I Want to Lower My Rate and Monthly Payment. I Have a Fixed 30-Year Loan at 6%. I Bought it for $132,000 and Now Owe $125,000. The Property Has Fallen in Value. I Don’t Wish to Move Back Into a 30-Year Loan, But if I Take a 20-Year Loan My Payment Increases and I have to Pay PMI. What Can I Do?

A: I’m afraid your options for getting a conventional loan refinance are very limited at this point due to several factors. First, the drop in value in your home has eaten away your at equity, and your home appears to be underwater. Most lenders simply will not refinance a property that has “negative equity.” Second, you have lived in your home just a little more than three years. So you’ve currently paid down only a very small amount of principle from your original loan. If you’re not willing to get another 30-year loan, as you’ve suggested, a new 20-year loan would raise your payments considerably – the exact opposite of what you’re trying to accomplish. Lastly, while interest rates have come down to about 5% since you originally bought your house, realize that such low interest rates are reserved for customers with excellent credit and at least 20% equity in their homes. All is not lost, however, as it’s possible that a VA loan may help you – or possibly another government-backed loan program.

Consider a VA Home Loan

If you don’t already have a VA loan or know about VA home loans that are available to veterans, be sure to check out official website of the U.S. Department of Veteran Affairs and their home loan information center (http://www.homeloans.va.gov) for more information about various mortgage options. Remember, though, that the VA doesn’t make loans; they just guarantee loans.

Among the many benefits of VA-backed home loans are:
•   a negotiable interest rate
•   relative low closing costs
•   no mortgage insurance premiums
•   an assumable mortgage
•   a loan with no pre-payment penalties
•   possible financial assistance when a borrower experiences financial difficulty

As you may or may not know, getting a VA insured loan requires you to first secure a Certificate of Eligibility. You can do this over the Internet (http://www.vba.va.gov/pubs/forms/vba-26-1880-ARE.pdf) or with the help of a loan expert who specializes in VA loans. That’s where I’d start to see about potential refinance options. Also, here’s another VA resource, (http://www.homeloans.va.gov/pdf/veteran_registration_coe.pdf), that explains how to register on the Veteran Information Portal and obtain your Certificate of Eligibility online.

Making Home Affordable

One last option would be to investigate President Obama’s $75 billion program to help struggling homeowners either modify or refinance their home loans. You can learn more about this program at http://www.MakingHomeAffordable.gov.

What is the benefit of having both spouses names on a mortgage?

Author: The Money Coach

Q: My Husband and I Have a Home in His Name. If We Refinance In Both Our Names Next Year, When My Credit Improves, What Are The Benefits of Doing So and What Happens With Our Original Loan?

A: If your credit does improve and interest rates remain low, one benefit of refinancing is that you and your husband may qualify for a much lower rate, thereby lowering your monthly mortgage – and possibly saving thousands of dollars in finance charges over the life of your loan. In a refinance done under both of your names, the bank will look at both of your incomes and likely pull a “tri-merged” credit report on each of you, showing your respective credit histories with TransUnion, Equifax, and Experian. The lender will typically use the middle credit score for each of you, and will base your loan rate on the lowest of the two middle scores shown by you and your husband.

Can You Get a Better Deal?

After owning your home for some time, it’s only natural that you might start to consider whether or not you should refinance your mortgage. This is particularly true if interest rates have dropped considerably since you first obtained the home, or if your credit has improved dramatically. In these instances, it’s likely that you will be able to get a much better deal on a new mortgage than your original loan. Before you commit to refinancing, however, make sure you realize the implications of doing so.

Do’s and Don’ts When Refinancing Your Home

To begin with, refinancing can eat away at your home’s equity because refinancing is not free. A refinancing means you take out a completely different mortgage. The refinance process entails paying off your old loan and replacing it with a new one, and banks aren’t in the business of making loans free of charge. Even if you hear lenders talk about a so-called “no cost” refinancing, don’t believe it. A lender might not have an application fee, or charge you points to refinance, but those costs and others associated with refinancing are essentially priced into a loan with a higher interest rate. As you’ve heard many times before, “There’s no such thing as a free lunch.”

Tax Benefits of Your New Mortgage Not as Great

You probably remember that points you pay to obtain a mortgage are tax deductible. When you refinance, however, any points you pay must be amortized over the life of the loan. In other words, you can’t take the full deduction for the points in one year, as you can do when you buy a house.

As with a home equity loan, you should never refinance into a larger loan than is necessary. Unfortunately, scores of homeowners do this all the time when they sign on the dotted line for a “cash out” refinance, which allows you to not only get a better rate or more favorable loan terms, but which also allows you to get some dollars back in the deal as well. A cash out refinancing saps equity from your home, so you should only take that money if you plan to use the proceeds wisely. Guard against frequent refinancing, too. If rates drop a half point or even a full percentage point, do the math to figure out if any monthly savings you can generate will really outweigh the closing costs and other fees associated with a refinance. I can’t help but wonder if many consumers are really just cheating themselves out of the opportunity to build wealth due to excessive refinancing.

Don’t Refinance Your Way Into a Negative Equity Position

Consider these facts: Nearly nine out of 10 consumers who refinance their home loans take cash out in the transaction. In 2006 alone, Americans cashed out $352 billion worth of home equity – more than a 10-fold increase in the amount cashed in the year 2000. Moreover, when the Joint Center for Housing Studies (JCHS) at Harvard released its annual survey of housing, called the “State of the Nation’s Housing 2007,” the results were especially sobering.

The JCHS report indicated that 13% of individuals and families who bought homes in recent years (in 2003 and 2004, to be exact), already have “negative equity” in their homes. This means their outstanding mortgage debt exceeds the market value of the houses in question. Unfortunately, the news is even worse for more recent buyers. A November 2007 survey by Zillow found that nearly 16% of homebuyers who purchased houses in 2006 had negative equity, as did 17.5% of those who bought in 2005. As of early 2010, the number of homeowners facing negative equity has mushroomed to as many as 25% as real estate prices remained soft.

Importance of Comparison Shopping

As with all financial products, you should shop around for the best loan terms you can get in the event you decide to refinance your mortgage. Don’t just accept the first offer that comes your way. In considering a refinancing, follow the same vigilant standards you used to evaluate lenders and their offerings when you bought your house. This means you should know the annual percentage rate on your new loan, all fees charged, as well as key payment terms, such as whether a prepayment penalty exists.

Final Words of Caution

Don’t ever sign any loan documents that you don’t understand and don’t agree if any loan officer or mortgage broker asks you to put your signature on a blank document with the promise that he or she will fill it in later. You don’t know what they could insert into those loan documents. Also, make sure you get copies of everything in connection with a new mortgage, including a Good Faith Estimate, a Truth in Lending form, as well as the mortgage, note, and/or promissory document you must sign.

For more information about getting the best mortgage, and tips on refinancing your home, read my book Your First Home: The Smart Way to Get It and Keep It.

Ask The Money Coach

Posts Tagged ‘negative equity’

Should I Do a Short Sale, Deed In Lieu of Foreclosure, or File Bankruptcy?

Related Questions:

My Husband and I are Underwater on Our Lovely Historic 1930 Era Home, Which We Hoped to Grow Old In. We Paid $783,000 for it Back in 2005, When We had a Six Figure Income as a Couple and Could Afford It. Our Home is Now Worth About $500,000. What Do We Do?

Related Questions:

I am a U.S. Army Veteran Having Trouble Refinancing My Home What Can I Do?

Related Questions:

What is the benefit of having both spouses names on a mortgage?

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Ask The Money Coach

Posts Tagged ‘negative equity’

Should I Do a Short Sale, Deed In Lieu of Foreclosure, or File Bankruptcy?

Related articles

Related Questions:

My Husband and I are Underwater on Our Lovely Historic 1930 Era Home, Which We Hoped to Grow Old In. We Paid $783,000 for it Back in 2005, When We had a Six Figure Income as a Couple and Could Afford It. Our Home is Now Worth About $500,000. What Do We Do?

Related Questions:

I am a U.S. Army Veteran Having Trouble Refinancing My Home What Can I Do?

Related Questions:

What is the benefit of having both spouses names on a mortgage?

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