You mentioned showing income of $11400 to the IRS and not being able to count the losses on your taxes. While this would be true if you had over $25k in annual real estate loses or insufficient other income, the IRS does allow for some real estate loses (for non-professionals) to be recorded during the current year and you can roll the remaining loses forward until some point in the future depending on your other taxable income, etc. so you should get some tax benefit each year.
In terms of being able to purchase another home and the various lender rules, you may want to rent your condo out for a few months and then purchase a home. The reason being that the lenders require some seasoning on the rental income before they will count it in your DTE ratios. Once seasoned, the lenders are less likely to think of you as a buy and fly buyer. A helpful mortgage broker can help you navigate this scenario.
Since you mention that your out of pocket is likely to be only $4k and assuming you can carry that burden, that sounds like a much better solution than writing a check to the bank every month to the tune of $110k....one would hope that the market would improve some time in the next 25yrs and you could recoup some of those losses.
If you can afford to write the check, then keep control of the situation and make the best of it. Short sales are meant for folks who truly have a hardship. The rest of us have a moral obligation to fulfill the terms of the agreements that we made with the banks.
a couple of thoughts in addition to my original comments...
The discovery of a potential buy-and-bail borrower is usually found during the underwriting process, not at pre-approval. So, the rejection comes only once you've searched for and entered into a binding contract to purchase and you are only weeks/days away from your closing. What a nightmare.
Short sales, foreclosures, bankruptcies, etc have a huge, hidden, expense that is virtually impossible to quantify: The additional price and interest one must pay with a diminished credit score. Credit score drops and, BAM! Your interest rate on your credit cards skyrockets. Unless you pay off your balance every month, that cost adds up quickly. Car insurance costs more. Any new loans cost more. And this all lasts for years! You don't just walk away from a short sale. Its repercussions haunt your wallet for a long time. You may be able to figure out what your costs might be, and then weigh this against that $4,000 a year you'll have to make up on the mortgage.
I have a great attorney (who I do not get a referral from or ask for any money for my help) who will talk to you for free and give you some good advice, I am using him on my own property. Secondly there may be something else to help you. I offer free consultations and help to anyone going thru this or similar situations where you are underwater. I can not always help you, but I will certainly try.
Thank u for all your answers. I attempted to reply to each but for some reason am unable to.
In response to some of your comments:
Carolyn Bird - Refinance:
This was the first thing I attempted, but Bank of America (my mortgage serv â€“ Fannie owns the loan) told me that I had to pay the underwater value, closing cost and my LTV after refinance could not exceed 80%. In other words, I had to come up with more than 120k in cash for them to refinance my loan. My response to them was that if I had that cash I would be better off buying 3 places cash and then use the rental income to pay off the loan. If they would have allowed me to refinance I could have rent and break even. If what Ken Anderson said is in the works; this will help me and many others from walking away.
Renting: Since the rental income will not cover my mortgage, businesswise it does not make sense. The place rents for $950 and Iâ€™m paying $1284 (this will go up once I transfer my homestead). This means that I will have to put 4k per year from my pocket just to cover the mortgage. Any repairs is extra. Also, in terms of IRS, they allow you to deduct the HOA, taxes, interest, repairs, enhancements and depreciation but not the loss incurred by the difference between the rent and the mortgage (950-1284 = -334). They assume you collected 950 *12 (or pro-rated rent). This makes it look like I made 11,400 per year (minus the deductions) but the truth is that I lost 4k on top of the deductions. In other words Iâ€™ll have to pay taxes on money I never made. This would only make sense if the place is paid in full or you are making some cash flow from the rental. Otherwise it is not worth it. Specially since I donâ€™t see this market going up in the next 5 to 10 years.
Alys Esmond (thanks for the link. Very informative) - Mortgage Broker:
I went to get prequalify and based on my salary and down payment I am able to get another loan for up to 130k. I did take her a copy of all my docs including my FICO and taxes. I have a 20% down payment, but that depends on the property price (if the new place is 50k, Iâ€™ll be able to put 50% down if required).
Attorneys: Went 2 three attorneys and two of them told me to stop making payments and then they will arrange for a short sale but were not able to tell me if the bank were going to forgive the deficiency, give me a note or 1099 or even accept the short sale req. The third one suggested that I buy another place, transfer my homestead, rent out the underwater condo and then go chapter 13. This will break down the loan into 2 pieces (secured/unsecured). The secured part is secured by the condo and the unsecured part (the underwater value) gets thrown into an account. After separation, based on my income/expenses they set a monthly fixed payment for the next 3 or 5 year. The unsecured part gets eliminated or reduced to pennies on the dollar. The bad thing about this is that it stays in my credit for 7/10 years and I wonâ€™t be able to finance anything until I get discharged (3 or 5 years after bk depending on court) and my FICO goes up. But it will protect me from any lawsuits issued by the bank.
Agents: Met with two â€œAgentsâ€ (notice the quotes) regarding a short sale. One of them, wanted to charge me 1k upfront (this is in addition of his sales commissions). 500 for listing the property on the MLS and the other 500 to fill the docs required by the bank. He also told me that he will make the short sales request â€œlook rightâ€. In my opinion this is illegal, but I havenâ€™t been able to confirm (the 1k charge + â€œlooking rightâ€). The other agent, told me that by doing a short sale my FICO was not affected at all. This to me was a red flag that this guy was a â€œjokeâ€ and had no experience nor knew what he was talking about. I never called either one back and went to a lawyer for advice.
Thank u all for the info provided.
The government is working on a new program to get the really low fixed rates on existing home owners mortgages so the burden is less. This may be a more viable option. A short sale will not leave your credit intact in any event.
A bank secures a mortgage with the property they lent the money on, not generally other properties unless you put them up as collateral. If you do a deed en lieu and give the bank the property again you will get hit hard on your credit scores.
I would suggest speaking with lenders and possible a real estate attorney to get a good idea of where you are at.
All the best,
Ken Anderson - Broker
CSP -Short Sale Certified
ApexOne Realty, Inc
Do not hesitate to contact me if you have any questions.
Ada Sanchez, CDPE (Certified Distressed Property Expert)
Pacific Atlantic Realty Service, Inc
you may have an excellent credit score, but you are probably not particularly 'credit worthy' for a loan for the purchase of a new property. Mortgage brokers (or Loan Originators as they are now called) are required to be on the look-out for the "Buy and Bail" borrower, i.e. someone underwater on their current mortgage and wants to get a loan for a new home and then walk away from the underwater property, i.e. you.
IF you are able to secure financing for the new property, and IF you can short-sell your condo, be prepared for the bank to take a note for a good portion of the balance of your condo. And, that note will be 100% utilized for as long as it takes you to pay it off. Also, a short sale in your credit history does not simply take x-number of points off your credit, there is a maximum number your FICO score can be with it there. Check out this link as to the relative effect of negative items to your credit score:
Whether or not a lien can be placed on your new primary residence is a question that can be addressed only by a bankruptcy lawyer.
I'd suggest really converting your condo to an investment property and find yourself a tenant who will pay your mortgage for you. You get to keep your credit score and get a new home.
Century 21 Professional Group, Inc.
If you have another questions, please send me an e mail : MarisoL87@hotmail.com.
You need to ask an attorney about garnishment of wages due to a foreclosure or short sale.