When trying to sell an upside down condo or underwater home, consider all your options and how short selling or foreclosing you property could affect your credit.
Q: I currently own and live in a condominium. But I want to sell my condominium and buy a house. But because I’m upside down in my condo, I’m not able to sell it and buy a house. I don’t have any problems paying my mortgage and my credit is excellent.
I was wondering if it would be reasonable for me to approach my lender and inquire about any foreclosures they have on their books. I was thinking I could do a “trade-in” and have them take my condo for one of their foreclosed houses.
I know that the house would be more expensive and I’m prepared for a bigger mortgage. Is something like this possible? Or, do you have any suggestions? I don’t want to be a landlord. It seems as though there are different options for people who are struggling or made bad home buying decisions, but seems to be nothing for those who have been responsible in making all their payments, but are upside down in their mortgage.
A: This is a great question. You’d think that lenders would fly to embrace your idea of trading one property for another, but the reality is quite different. The housing bubble burst and left many real estate lenders holding mortgages on properties that are worth far less than the underlying debt. You are underwater with your home. That is you owe more to your lender that your home is worth. As you said, you’re upside down and to get out from under you’ll have to come to closing with cash.
Unfortunately, you as a consumer see your big box lender as “your” lender, when the reality is that your big box lender is servicing the loan for a pool of investors. In fact, your loan could be part of several investment pools.
Due to the way mortgage loans were sold and continue to be sold, the actual holder of the mortgage to your home may be a group of investors. It’s hard enough to get that group of investors to allow a homeowner to sell his home in a short sale, it would be doubly hard to get them to agree to release the debt on your home and agree to give you a new loan on a different, albeit distressed, home.
Here’s why: When you obtain a loan on one property, you sign a promissory note to the lender and promise to repay the debt. The lender in turn requests that you sign over your home as collateral for that debt. The whole process would break down when you ask the lender to let you go from one home to another home and “keep” the same debt. The lender actually has to release the lien they have on your current home and if you became the owner of a new home, the lender would have to obtain a new lien on that home as well.
Basically, you’d be selling your old home and buying a new home. While you might think that your lender could do a swap, the lender would see both transactions as independent. For the purchase of the new home, the lender would want to review all of your financials and qualify you for that new purchase.
Even if you could argue that your condominium is worth $100,000 with a debt of $120,000 and you were looking at a home worth the same amount, the lender would have trouble giving you a loan of $120,000 on a home worth $100,000. In theory, if you were dealing with a family member giving you the loan on one and giving you a loan on the other, you could see it happening, but in the world that lenders live in, it would not be possible.
However, you bring up a different issue in your question. If you have no equity in your current home, but have savings and you were willing to use those savings to make your current lender whole, you could sell your condo at a loss, then buy the home.
Few consumers might have the cash to sell their current homes at a loss, but if your condominium is worth $100,000 and you have a debt of $120,000 on it, it might take about $30,000 to come out from under your current ownership of the condominium and then buy a home.
Let’s say you have that cash available and more. You could do it and not suffer any negative consequences to your credit history or credit score. While most people would think it would be crazy to put good money into getting out of your condominium, there are homeowners with cash that have done just that.
We see it as the reverse of what happened during the boom real estate years. In those years, people would sell their existing homes for a profit and move into homes that are more expensive. Frequently, those same homeowners would plow more money into buying those expensive homes.
Well, in this scenario, you would do just the opposite. Keep in mind that people are less willing to lose money psychologically than put more money into buying a home when prices are rising. But if you’d be willing to sell a home for $150,000 to buy a larger home for $250,000 – a $100,000 difference – you might be willing to do the same at a loss if you were to sell your current home for $100,000 to buy that larger home for $175,000. Now the difference might only be $75,000.
You’d have to evaluate your financial situation and determine whether you have the ability to pay off your existing lender in whole and still have enough money to buy the new home.
If you can’t swing it, then your other choice is to sell your current home in a short sale, take the credit history and credit score hit, rent a home, then wait for your credit history to recover and reenter the market to buy a home. In a short sale, you are able to sell your underwater (upside down) property and move on.
By the way, some people might suggest that you not sell your current home in a short sale and merely buy your other home with cheap financing at today’s rates, then let the home go into foreclosure or then sell the home in a short sale. Unfortunately, if you elect to go down that path, you will end up hurting your credit score and credit history and in some parts of the country, you’d risk having the lender come after you for the deficiency left behind when the lender wasn’t paid in full.
Given that you have great credit now, you might want to talk to a mortgage lender or mortgage broker in your area to see what options that person thinks might be available for you.