I have a 10 year interest only loan with 7 years left and no equity. I am current on my payments but the home is about $150,000 up side down.

Asked by Ben, Apple Valley, CA Tue Jan 12, 2010

I make 3 figures a year and have a 7 plus fico. I was recently denied a loan for a second home because of the status of my current home, and they think I will " Buy & Bail " The bank also countered and said I need to sell my current home to qualify. I also contacted my bank for assistence/guidence but there was'nt one thing they can do or advise. We need a bigger home, Should I sell my home short sale status?

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13
James Foy, Agent, Costa Mesa, CA
Wed Jan 13, 2010
BEST ANSWER
Ben,
This answer is going to go against the grain, but I'm in the area and know exactly what you're struggling with. I could rent a house that is new and twice the square footage for what my mortgage payment is in the High Desert.

The first thing to remember is that CA is a non-recourse state. The only thing the bank can do is hurt your credit and foreclose. They can not go against your other assets. If the loan on the house was not used to take money/equity out of the house, and is the purchase money loan, there is a form to fill out so that you do not pay taxes on the banks loss on the loan.

As you have not paid any principal down, I would advise you to think of all the money spent as rent (that has been an interest deduction--call it a rebate on the rent). I don't believe prices are going up in the next 3 years. In fact, the there are a lot of reasons to believe the government is propping up the housing market, and the Association of Realtors spent a lot of money keeping the tax credit going.

If you need a bigger house, and the above applies to you as far as your loan goes, WALK AWAY FROM YOUR HOUSE. Possibly ask your lend for a "cash for keys" deal, where you give them a "deed-in-lieu" of foreclosure and they pay you a small amount to move. It will help you get your credit back faster.

Read these two articles( refer to my blog, Trulia won't allow me to post the links here), and portions of my blog that refer to reasons why the housing market is going to be stale. Don't worry about your credit score. A credit score is good for acquiring debt.

There are a lot of larger houses in our area that you can rent for $1500/month. You also won't have to deal with maintenance. There are even some rent-to-owns, but most RTO's and lease-options require you to assume all duties of an owner.

In two or three years, you'll qualify for a loan again. And prices are likely to be at or near the same levels UNLESS our country's economic policies end up in currency devaluation ala Venezuela or Zimbabwe in which case we all have bigger problems than home ownership.
0 votes
Harold Sharpe, Agent, LAKE HAVASU CITY, AZ
Sun Apr 4, 2010
Hi Ben,
I read some of the info below and you may want to read the state tax code on short sales as it aplies to you home before you make a decision,....
http://www.ftb.ca.gov/professionals/taxnews/2009/July/Article_9.shtml
California Does not appear to forgive since January 1 2009.

Enjoy your home or make it a rental if you must but I hop you continue to abide by you word and your promise to pay.

Harold Sharpe - Broker
So Cal Homes Realty
(951) 821-8211
harold@socalhomesrealestate.com
http://www.socalhomesrealestate.com
California Department of Real Estate License # 01312992
2 votes
, ,
Thu Aug 15, 2013
I was just looking through old post and I noticed yours. If you were not able to refinance at the time of the post, I can certainly help you out now. You can call me at 408-352-5147 or email me at AGreer@themortgageoutlet.com. You can check us out at http://www.TheMortgageOutlet.com. I will look at your situation and present you with some options.

Alex Greer
NMLS #1056079
0 votes
James Foy, Agent, Costa Mesa, CA
Wed Jan 12, 2011
Ben,
It's a year to the day since you posted your question. How have things gone for you?
I was just reading through the answers, and realized that CA's highest tax bracket is around 10%, so walking away from $150,000 shortage would be a $15K tax hit.
Also, unless Jerry Brown has learned from the past, we might see increases in property tax rates. I have seen water and sewer rates triple in the desert, especially with the VVWRA, so, as long as you are "attached" to CA, they will find ways of raising funds for their pet projects.
I hope this new year sees you in a better position than last.
0 votes
sarah oswald, Agent, Eastvale, CA
Wed Jan 12, 2011
Hi Ben,

If you purchased the property before 2009 and the property is underwater and you NEED a house, I recommend that you contact the lender first and try to workout a loan mod with them. If that fails, then consider a HAFA shortsale. Sometimes is best to let it go and start all over. The wait period is 3 years after a shortsale.
Good luck.
0 votes
James Foy, Agent, Costa Mesa, CA
Sun Apr 4, 2010
Ben,
Everything I've read says Harold is correct. California will be bring in whatever money it can in the next few years.
0 votes
Keith Sorem, Agent, Glendale, CA
Sat Apr 3, 2010
Ben
You are going to hate my answer.

First, just based on your question:

1. I need a bigger house - need vs. want. Need? Then if you cannot sell, yours, rent it out.

2. Do not walk away from your home. You won't be able to buy for five years...no mortgage interest deductions, you'll pay a TON in taxes, PLUS they will 1099 you for the deficiency to you will be totally screwed financially.

3. If you earn that kind of money you must be pretty sharp. You have an obligation to pay the note. You signed a written promise. Be a man, talk to the bank, negotiate a loan mod (if you can), otherwise figure it out.

Put yourself in the shoes of the poor sucker that bought your loan. Let's say that YOU get an email saying "by the way, that investment you made, well, they decided to stop paying, although the guy makes six figures and has a FICO of over 700" Can you say "send this to a collection agency"?

You need to be smart, and not tick off the lender, or they will come after you.

IMHO, you need to do the right thing....not the convenient thing...but that's just me..
0 votes
James Foy, Agent, Costa Mesa, CA
Fri Apr 2, 2010
If you can find someone to sign a long term lease for your home, and can afford to pay the difference, you might be able to qualify for a new loan. You might actually have to move out and have the renter in there before you do this though. Just a 2nd look at your situation.
You'd have to move twice if you could, but either way, you'd end up in a bigger home. Also, you'd get a tax deduction for depreciation on the older, more expensive house (price/27.5 years) so this might help offset some of the money you're losing. Also, as a landlord, you get a lot more deductions. You should be trying to find as many write-offs as you can.
You might find that with the rental income, depreciation and other write-offs, you're making the equivalent payment on a bigger house.
For example: Your old payment is $2300/month on a $300,000 home. You can only rent it for $1200. The home is valued at $275,000 and land at $25000 (can't depreciate the land) so you get a $10,000 write-off for depreciation and nearly $20,000 for mortgage interest. You can write off some of your new home as office space, and there are lots of other deductions that are legitimate (ask your CPA--if you're making over $100K and don't have a CPA or EA, GET ONE!) and you may find another $20K in write offes. Let's be conservative and say you only have $50,000 in write offs for the house, that changes your tax bracket, so hopefully saves you about $15-20K which is divided by 12 equaling $1250-1,666/month in tax savings. That compensates for the $1100/month in payment difference or very closely if the bank only counts 75% occupancy.
I don't know what your numbers are, but I hope this gives you another option. Good Luck, and Happy Good Friday.
0 votes
Tim Ambrose, Agent, Castro Valley, CA
Fri Apr 2, 2010
OK Ben,

I'm going to go out in left field and say, let the house go, find a bigger home to rent for a few years and buy again when your credit is right. That said, consult a tax professional and a bankrupcy attorney. You are truly caught between a rock and a hard place.

Best of Luck

Tim
0 votes
Larry Echava…, Agent, San Diego, CA
Wed Jan 13, 2010
Well usually if you really needed to sell your current home because you were in default do to circumstances out of your control you could prove a valid Short sale, in this type of situation you would have to short sale because your upside down 150k even to sell, just to sell, unfortunately if you did a short sale you may not even still qualify for another loan, depending on what you negotiate with your lender, short sales do place a small ding on your credit. But since you’re not behind on any payments a short sale may not even be approved. Have you thought about renting the home? You probably wont get enough to cover your mortgage but if you can I would see about going this route, you can use the rental income to possibly get approved for a new loan depending on where this puts your D.T.I.

If you have not refinanced your loan you most definitely have a Non Recourse Loan.
Which does mean the lender cannot come after you for a Deficiency, please don’t quote me on this I always recommend seeking the counsel of a tax attorney or a real estate attorney?

With reference to the prior posting if you Walk Away from your House and do a Deed in Lieu of Foreclosure you may not be able to buy for a few years (Like at least 5), so to say the better of the 2 would be in my opinion, would be the Short Sale Why? Well you have a part in and controlling the sale, Foreclosure the Bank does everything and you have no say so, and it goes on your credit as a FORECLOSURE which will definitely prevent you from buying for at least 5-7 Years. Short Sale you can try to Negotiate a Satisfaction, and worst case scenario, you will be able to buy in about 2 years. I tell people that I help get out of there bad loans when we do a short sale, to go get one of the Lease option homes and do this for 2 years so that when the time passes to buy again you have a home and you were able to secure it in today’s market, at today’s prices.


If you decide you want to or simply have to walk Away give me a call I may be interested in buying your home I do buy homes from sellers needing to sell because of unfortunate situations. But please by any means if you can afford the home try to tough it out.

I don’t know your situation other than what you posted, but if you can try to, keep your home, your not alone there are millions of Americans facing the same situations and are still paying the mortgages on home’s that have no equity in them. Not to say that you walking away or short selling is a bad thing, if you have to then you have to, and that’s understandable and really out of our control, if your mortgage adjusts, I’m guessing you may have a payment that will eventually be Un-affordable.

Well I really hope this helps and if there is anything that I can do to help like I said if you want to sell I may be interested in Buying your Home.

Good Luck…Best Wishes to and your family…
Larry@tele2enterprises.com
0 votes
James Foy, Agent, Costa Mesa, CA
Wed Jan 13, 2010
Ben, as an addendum to my answer, do some research on "recourse vs. non-recourse states" and talk to your accountant to see where your mortgage falls as far as tax liability. Good luck.
0 votes
The Medford…, Agent, Fremont, CA
Wed Jan 13, 2010
Ben:

To sell short, your lenders are going to need to verify that you are facing financial hardship. It does not appear that is applicable in your case. Most short sales occur when the owners, through loss of job, mortgage readjustment, etc. are faced with the inability to continue making their payments. They want to sell to get out from under their obligations but cannot because they owe more than the house is worth. Banks are not interested in reasons such as, “we need a bigger house.” They are motivated by sellers who have stopped making payments, forcing potential foreclosure unless a remedy (a short sale) is provided.
.
0 votes
Maria Morton, Agent, Kansas City, MO
Tue Jan 12, 2010
You may not qualify for a short sale with the bank. You can sell and bring money to closing. Since the home is valued for less than you owe, banks are not going to want to refinance. This is going to be a hard life lesson for you but next time you buy a home, you will know not to get an interest only mortgage. Good luck to you and your family in 2010.
Web Reference:  http://MariaSellsKC.com
0 votes
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