Steve has correctly addressed an important issue (as he often does). If you decide to rent the existing property and attempt to qualify for a new home loan, your lender would first check to determine that you have at least 30% equity in the home to be rented. Without that, you will not be able to qualify with any percent of the gross monthly expected rent. So renting will not get you around the need to qualify with both mortgage payments.
These measures were put in place in recent years to prevent "buy and bail."
Your situation is a tough, but common, one and I wish I could provide advice on what you CAN do as opposed to what you cannot.
Best of luck,
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
If I were you I'd start the process of transitioning your TH into a rental property. Unfortunately you may need to
become a renter for a couple years in your desired target neighborhood but at least you wont have trashed your credit.
After your TH no longer primary residence and you have documented a couple years of tax returns where the TH is treated as a rental, the bank may give you more leeway on getting a new mortgage.
There are equity requirements that must be met in order to use rental income for income qualifying on a new purchase. I believe this currently ranges from 20% to 30% equity in the property being departed. Renting and buying would not appear to be an option given that you have negative equity.
Mortgage Brokers: please comment.
Historically, the San Jose market has not generated anywhere near a sufficient rental rate to justify property prices. But, with the recent correction in housing prices and the resultant decrease in homeownership, rental yields (capitalization rates) have spiked considerably, from around 2-4% to 6-7%. Demand for rentals is pretty strong now in San Jose, making renting a property a viable and even profitable option.
So, to make this option really viable, you'll need to locate a new property that has declined enough in value over the past 3-4 years to compensate for the loss in equity on your townhome. Then, your current townhome will support a significant portion of the mortgage payments through rental income and you will just have to make up the difference. Since you would have had to pay much more for a bigger home and a better school area, you can cover that difference from your budget, thus allowing you to afford a second home. This is effectively the same as somebody purchasing a smaller income-generating rental property as I've done many times, but you get to do it in reverse, taking advantage of the severe decline in property prices.
Yes, you will have to hang on to a property with negative equity for a while, but if long-term population trends hold, demand for housing will drive up prices in the long-run. It's not flashy, but it's sensible and responsible. Just make sure you get an agent who properly understands the numbers that drive your financial situation so you get the right property for your needs.
1) Meet with a couple experienced seasoned agents and get a feel for the real market value of your home and the cost to purchase the next home. Let them know that you are NOT listing and buying right now but you need some honest answers to discuss with your attorney and financial advisers. They should come from a consultative approach vs selling you on one option; listing.
2) Meet with a lender and get an over view of your buying power based on your income, credit and "lack" of equity in your home vs current mortgage.
3) Meet with a financial adviser and/or CPA.
From the information from these resources you will know your financial situation, buying power, tax consequences. You may add a 4th option and speak with an attorney regarding what happens in a short sale.
There are a few more layers to this, such as are you ok renting and giving up on owning right now? Will your current mortgage adjust in price and can a renter off sent any mortgage? Do you have family members who can help you? And more questions.
Best of luck to you.
Please ,please, please take Steves advice ( it is excellent ) really check this out with a cpa and a tax lawyer NOT a real estate agent , you could be in for a world of hurt financially, as well as bad credit and possible fraud if you take the wrong advice.Only consult an agent when you get this sorted out.
At your service,
Steve is correct. You can't walk into a bank and ask them to allow you to sell your home for less than you owe when you also have the ability to buy another home. There is a very long process of documentation to prove you have a hardship. The hit you'll take on your credit report is less than a foreclosure but there will be a negative impact. It's the same as defaulting on a credit card and paying less than the amount you owe.
This is not an easy decision to make or an easy answer to give.
David Sciplin, Realtor, SFR
Better Homes and Gardens
1) There must be a DOCUMENTABLE HARDSHIP (reduced market equity does not suffice; most events that reduce income such as resetting adjustable loans, unemployment, salary cut, disability, divorce, etc. do.
2) The owner must have a NEGATIVE balance when monthly debt is subtracted from monthly income.
3) The owner must be INSOLVENT. You won't get a Short Sale if you have non-retirement assets that can be sold to make up the difference.
If one is able to make their payments, and they want to be part of the problem, there is one other dubious option known as the “Strategic Default”. This “solution” has serious ramifications http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/11/11/ and if one considers this step without intimately involving both a CPA and Tax Lawyer they are as dumb as dirt! In addition, many who thought they got away unscathed may have a skeleton opening a door in the future. See Carl Medford’s blog post on this subject here: http://www.trulia.com/blog/carl_medford/2010/06/fannie_mae_p
One authoritative source you can reference regarding the ramifications of “distressed selling” comes from the Fannie Mae Selling (read underwriting) Guide, located at https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel120110.pdf Starting on page 430, section “Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit” covers the timelines and circumstances before one will be able to buy again broken out by “event”.
If you are truly considering a “distressed exit” from your home forget about contacting a Real Estate Agent at this time – speak directly with a CPA and Tax Lawyer, they are the consummate experts regarding these matters and the only place you should be getting your “exit strategy” that a Real Estate Agent may be able to help you execute.
There are many options open to you.
I am sure a short sale has been proposed and that paired with the correct financing, may make sense to short sale and buy a home right after. There are programs available depending if you qualify.
Give me a call and we can discuss those options.
With short sale, lender agrees to let you sell it below what you owned AND they pay all expenses. Some lenders will seek judgement deficiency. Some will waived. We are able to negotiate on our clients' behalf to let them walk even with investors.
Rent might be a better solution for you at this time and the next couple years (if you short sale). Why?
1. You don't have to pay for mortgage, insurance and property taxes. Your landlord will take care of that
2. Rental might be lower than own a house.
3. Your FICO scores is low and you need time to rebuild it. And I can help/show you how to rebuild it.
So, if you still have any question or would like to see our demonstration in numbers, please feel free to contact us at (408)426-1441.
I think your best move would be to speak with a Mortgage Broker to go through the process of determining how much you could afford if you converted your townhome into a rental and purchased a new primary residence.
Selling and coming to the table with the extra $250K is probably not a wise choice. A Short Sale is also probably not an option due to leaving your credit severely damaged to the point buying will not be an option for at least two years.