Short Sale...What Would You Do???

[RedLight]

Hello everyone. We are in a bit of a predicament and have a few months to get this all figured out. We purchased a brand new home in 2007 with an 80/20 30 year fixed mortgage. In 2008 we filed CH7 and discharged in December. We did a pay and stay on the house and lived there until August 2010 when we NEEDED to move because the school was rezoned into a terrible area...the majority of students do not speak english as their first language. So we leased out our home for a one year lease and we have been renting a home in a better area.

August is fast approaching and DW and I are trying to figure out what to do. We owe $134K on the home and comps in the area are now selling for $110-115K. Needless to say, we are upside down enough that we could not sell the home with realtor fees and closing costs.

We see two options only and wanted to see what others would do. We could either short-sale the house and wait the three years to get a new mortgage or re-lease the house out and hope that the market recovers. Also, we have never made a late payment so our mortgage company may not be willing to even entertain a short sale to begin with. Any help would be greatly appreciated.

[screentest]

Redlight,

They way I see your situation depends on what you "have" to do versus what you want to do. Do you just want out of the house and a chance to move on or could you stand to remain in a lease-out situation with renters? The later would depend on your experience so far with renters paying on time etc. Your really not that upside down if your numbers are correct. There is probably a reasonable chance your mortgage could recover in a few years (or longer)and then you could sell. (I am 300K+ upside down myself)

Other things to consider with the rental house are increased maintenance costs over time and a changing demographic in the neighborhood that could keep downward pressure on a price recovery. If your considering buying again the rental situation could benefit you if you have had it rented out for more than a year etc as FHA will consider 75% of the rental income against your DTI. Otherwise a completed short sale will allow you to be free and clear and start the 36 month seasoning for a new mortgage.

Good Luck

ST

[LadyInTheRed]

If the rent on the house is enough to cover the mortgage, tax, insurance and maintenance, I'd probably keep it and lease it out for as long as it wasn't costing money.

If I decided not to keep it and the debt was discharged in a Chap 7, I wouldn't bother with a short sale. Stop paying and try to negotiate cash for keys or just let the bank foreclose.

[RedLight]

Screentest,

Wow, at least we are not that far upside down. We just spoke to our real estate agent who helped us lease it out last year and she said it would need to be priced at $102K to get people looking at it. That with about 8% on top of what we owe, it would need to sell for $147K to not bring anything to the table. So, we are realistically upside down around $45K.

Our current renters are awesome and have taken excellent care of the home and we know that we may not be so lucky next time around. Additionally, they will be leaving in three months and we cannot carry the mortgage and current rent for very long at all. Also, the neighborhood is NOT moving, there are about 10 lots left and one of the two builders went under so things don't look good there. The amount of leases and foreclosures is high and think it will take many years to recover, if it ever does.

I am also wondering about the rental income and using 75% toward DTI. Does anyone know a definitive answer on how much equity you have to have in your home and/or any other stipulations needed to be met in order to qualify for a future FHA loan? Also, if we were going to do a short sale, when do we stop paying on the mortgage and when do we notify the bank we are would like to complete a short sale? I was telling DW we should just stop paying for the three months remaining that our tenants are in the home and keep the money in a separate account and pay it if needed...don't want the tenants to get booted. Thanks everyone.

[screentest]

Redlight,

Contact your lender and find out what their Short Sale requirements are. This will at least get you started down that path. You may find out they require you to be behind several months anyway and show a verifiable hardship before they will let you proceed with one.

In reality, because you are discharged, a short sale does nothing for you at all as far as time to purchasing again goes. FHA requires 3 year seasoning on Short Sales, DIL or foreclosure so really just letting the house go in foreclosure will allow you the most savings and time.

If you are sure you don't want to hang on and try with another renter for a while then I would chose foreclosure over the other options. Stop paying the mortgage and save the mortgage payments until the final foreclosure is complete. Probably going to be a year or longer in most cases. This should allow for a significant savings in the end and then you will just need to wait out the 36 months from actual foreclosure date. Short sale and DIL are both faster ways to transfer the note back to the bank but come with many more problems and strings attached in my opinion. I am currently letting our house go back to the bank in FC and have not made a payment in 10 months. They haven't even started the FC yet.

Directly from two FHA underwriters:

Requirements to repurchase after BK or Foreclosure;

620 credit score
3.5% down
MPI required
36 months after foreclosure completed
24 months after chapter 7 if no mortgage at all
If home rented out,(stay and pay) requires contract for at least 1 year before applying and FHA will only count 75% of the rental amount collected (even if more) as part of the DTI to qualify for new mortgage.

ST

[Sweetpea3829]

Quick question...what are your plans as far as purchasing another home in the near or not so near future? Because my answer would depend greatly on that particular piece of information.

I will say...I don't think you're that far upside down at all. We owe 250K+ on our 3 unit. Zillow has us at 160k. Our town revaluation came in at 190k (they're smoking crack).

The house just across the street from us...a 4 unit in need of work is listing for sale at 69k. I would say we could reasonably expect to sell our 3 unit for 120k.

Our home was worth 300k at the peak of the market in 2005/2006. *sigh*

[RedLight]

I guess our reasoning for the short sale over a foreclosure is specifically that the seasoning period will start sooner than later...much later. We just don't want the market to sit where it is at, keep leasing it, and we are unable to purchase a new house. If we continue to lease it out, we would be able to break even with the mortgage, insurance, and taxes. I guess that is why this is so difficult...we can make it work, it just doesn't feel like we will ever be able to get another loan until the house is out of our name. However, perhaps we would be able to use the 75% renter's income with a new lease. I think I will try to contact a few lenders and see if I can get some straight answers. The earliest we would be moving is next year so that gives us 3.5 years post-discharge. I also just pulled our scores and DW and I both average between 645-680. We should be able to get those up higher by then too. So much to think about.

Thanks a ton guys...this site is excellent and without it I don't know who I would bounce life-altering financial decisions off of.

[debee]

I am also wondering about the rental income and using 75% toward DTI. Does anyone know a definitive answer on how much equity you have to have in your home and/or any other stipulations needed to be met in order to qualify for a future FHA loan?

From HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance:


1. The seasoning date after chapter 7 bankruptcy discharge is two years. See section g of the current FHA Handbook here.

1. The seasoning date after foreclosure is three years, but can be reduced with extenuating circumstances. The lender may not see the foreclosure on the credit report, but it is a standard question on the loan documents. See section f of the Credit Guidelines section of the FHA manual here.

1. The seasoning date after short sale is three years if borrower was late on any payments within the preceding 12 months, but no wait if borrower's was current at time of short sale. See section l of the Credit Guidelines of the FHA manual here.

2. If you haven't sold your principal residence at the time you apply for a new FHA loan, you either need the income to pay both mortgages or you convert your principal residence into a rental subject to the guidelines. You can read about this aspect here and here.

[Sweetpea3829]

If you hope to own a home again soon, I would suggest holding on to the house and renting it out. We were in a somewhat similar situation (albeit slightly different) where we had a home discharged in a BK7 and wanted to purchase a new home. Our story is here if you're interested in reading the details. http://www.bkforum.com/showthread.ph...age!-Our-story.

Anyways...you're already in a good position to be able to get an FHA or other conventional mortgage, should you decide to do so right at 3 yrs post discharge. You're discharged home is already meeting the requirements that FHA has set forth to prevent "buy and bail" scenarios. You have the 75% ratio down AND will have been leased for at least a year. I'm assuming you can document that?

If you short sale the property, assuming the lender allows you to (and not being in default may preclude that), you will have to start off the 3 yr seasoning all over again, from the date of sale. Now...considering that a lot of short sales are taking months and months to go through...you may not actually achieve the closing of the sale until the end of this year, maybe even longer. Then, you'll have to start the seasoning clock, from that time.

If you hold onto the house, you're in a much better position to purchase a home again next year, as you mentioned you'll be 3.5 yrs out of discharge.

So if you desire to own again sooner, rather than later, I say hold onto the discharged home, continue to lease it out, and wait until after you've purchased again.

[RedLight]

Thank you everyone. I think we have decided to keep the home and continue to lease it out and let time work it's magic...hopefully it works in our favor and the market will improve. Thank you again to everyone.