Ask The Money Coach

Posts Tagged ‘underwater’

Q: I am a Single Woman Sharing a Mortgage with my Mother. I Purchased the House From her in 2004 to Prevent Her from Filing Bankruptcy and Losing her Home. We’ve Refinanced Twice and Now the Loan is Twice the Amount of What the House is Worth. My Credit is Not Great. I’m in Debt Minus the Loan on the House of About $15,000. The Bulk of That is a $10,000 Loan I Applied for an got (Surprisingly) While I was Unemployed. Isn’t That Called Predatory Lending. I Would Love to Leave Here and Find My Own Place But I Need to Get My Credit in Order. Some of My Debts are 5 Years Old. I Don’t Want to Pay These If I Really Shouldn’t. What’s the Best Thing to do? Also, Re: the $10,000 Loan, I Know I Should Not Have Applied for the Money But I was Desperate As Our Mortgage Was 3 Months In Arrears and In Danger of Being Foreclosed On. Is There a Way That I Could Get This Debt Removed as it was a Predatory Situation?

A: It sounds like you and your mother can not only not afford your home, but the house itself is also severely underwater. I understand your desire to improve your credit and get your own place, but honestly, you must fix problems A, B, and C before you can move on to issues D and E. In this case, problems A, B and C are: getting realistic about your financial past and present, learning how to create and live with a budget, and dealing with your home dilemma. Until you first do those things, you won’t be able to pay off your debts (issue D) or improve your credit (issue E). Without tackling first things first, you’ll also put yourself at risk of losing another home simply because you’ve neglected to learn certain financial lessons.

So let’s start with the first thing: a reality check. You seem to have attempted to throw your mother a lifeline, only to wind up nearly drowning yourself. Your email said you bought the home from her back in 2004 to help her avert bankruptcy and foreclosure. Despite your best intentions, you also stated that you and her wound up 3 months behind on the mortgage and in danger of being foreclosed upon anyway. That’s what led you to seek out the $10,000 loan you’re not saddled with. What happened to during the time of your unemployment? Your message indicated that you were twice laid off and that you “made some not so smart money decisions?” Whatever those decisions were, you have to truly acknowledge them, and make sure that you don’t repeat them.

It sounds to me as if you had your mother have been stuck in a cycle of making repetitive bad decisions. I hope you don’t think I’m being too harsh on you. Because I’m telling you these things honestly out of care and concern for your situation. I can sense your struggle and I know it’s very hard to be in such a tough predicament. I’m just giving you a bit of “tough love,” however, because I’ve seen cases like this time and time again. The only way people get out of these dilemmas is by actively breaking the cycle and ending the behavior that landed them in hot water.

Now let’s move on to the second issue: having a proper budget. Unfortunately, most of us grow up never having learned to create a realistic budget. This is likely true of your mother, and it’s probably true for you as well. Read this article I’ve written on budgeting and this post too, to get some ideas on how to budget to better manage your finances. Additionally, read this post about budgeting and financial planning when you go thorugh a layoff or have reduced income.

So what about the house? The fact that you’ve both faced foreclosure at least twice, and have even refinanced twice since 2004, yet you have still wound up deep in debt and deeply underwater tells me that you can not truly afford this home. I assume you refinanced in recent years to take advantage of relatively low interest rates. But I also suspect that you took cash out of your home as well. I could be wrong. But that’s certainly what many people did during the heydey of the housing market. How was that money used? Did you pay off debt, set aside any savings, or do something else with it? I recognize, of course, that part of the reason your house is likely under water is because home prices have fallen greatly in many parts of the country. But the fact that you owe twice as much as your home is worth signals that something else was going on.

If I were you, I would investigage the prospects of a short sale or a deed in lieu of foreclosure. I don’t know where you live, but it’s highly doubtful that your home will “come back” in value anytime soon. Unfortunately, short sales and deeds in lieu of foreclosure do have negative ramifications for your credit. But these are short-term hits from which you can recover, if you’re prepared to move on and do the right thing financially in the future.

You asked about the loan you got while you were unemployed. I don’t know of any way to legally get this loand eliminated or removed from your credit reports. Just because someone loaned you money at a time when you weren’t working doesn’t make the loan a “predatory loan.” Unfortunately, scores of lenders all across the country did this — both reputable lenders and not-so-reputable ones. Honestly, I don’t know which camp your lender falls into.

Nevetheless, again, I want you to be willing to take responsibililty for your own actions, and not put the blame elsewhere. You stated to me that you knew you shouldn’t have applied for the loan in the first place but that you were “desperate.” Plus, the reason you applied for the loan was because you were in arrears on your mortgage. That’s certainly not the fault of the lender that gave you the $10,000 loan. So it’s not fair to now accuse them of “predatory” lending. Predatory loans are characterized by unreasonably high interest rates, abusive pre-payment penalties, or excessive loan fees including enormous commissions for lenders or mortgage brokers.

Don’t worry about paying off 5-year-old debts at this point. You’ve got enough on your plate to try to pay your current bills. And trust me: In the long run, you will be far better off if you take my advice and deal first with these issues before you attempt to pay off old debts or improve your credit rating in order to try to get another place to live.

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Q: I Purchased a Two-Family Home After I Graduated with the Intention of Building Equity and Eventually Selling the House So I Could Pay Off My Student Loans Quicker. I Had Always Planned to Sell My Home in About 5 Years. But Several People Have Advised Me to Hold on to the House for at Least the Next 20 Years so that the Mortgage Will Eventually be Paid for With Rent Money and I Can Get the Full Value of the Home When I Do Sell It. Is This a Smart Thing to Do For Someone Who Pays Back About $600 in Student Loans Every Month? I Really Want to Be Free of My Student Loans in 10 Years or Less.

A: I don’t agree with the advice you’ve been given. I think it represents old-time thinking. Gone are the day when people had to (or wanted to) keep a home forever just for the sake of having a having a home that was owned free and clear. Don’t get me wrong: It’s still great to have a mortgage free property. But in your case, this sounds like a rental and perhaps not your primary residence. Even if you do live in one part of this two-family home, it sounds like the whole point of why you bought it was to pay off those student loans as quickly as possible. In other words, this property was an investment. Pure and simple. So you shouldn’t get emotionally wrapped up in it and feel like you need to keep it until it’s paid off.

Neither do you need to wait until the 30 year mortgage is paid off in order to get the financial benefits of property ownership. So if your goal is to quickly rid yourself of those student loans, by all means, I would encourage you to look into selling the property.

One caveat applies, however: You said you bought it with the hopes that it would appreciate and then you could sell it. I don’t know how long you’ve owned this home. But if you bought in in the past 2 to 5 years, it’s possible that it may have done the opposite of what you’d hoped — not appreciated, but actually fallen in value. If this is the case, your equity may have been diminished or wiped out completely, making a sale difficult. Under these circumstances, I would advise you to hold on to the property for a year or two longer – or at least until the real estate market turns around.

Here’s what to do right now. Get a local real estate expert to come see your property and give you a comprehensive market analysis, which will tell how you much you could likely sell the home for in the current market. If the home isn’t “under water” — meaning you own  more on the home than it’s worth — then you can consider selling it. If all works out, and you reap a chunk of money from your real estate sale, you’d be wise to pay off those student loans, or at a minimum to knock out a huge part of your college debt.

Keep some money from the sale of your home, if you can, just to have some extra cash in the bank. It’s always good to have additional savings, because you never know when unexpected circumstances may arrive that force you to tap into your emergency fund. Also, if something unanticipated happens – such as a job layoff – you’ll have some savings to tide you over, and you won’t wind up in credit card debt.

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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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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.

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