Buy and Bail - Do I have this straight?

[pinkpeanut01]

I've been reading posts all morning, trying to wrap my head around this concept of qualifying for a new mortgage after doing a stay-and-pay.

Here's my hypothetical.

Say I want to move to a new house about 2 - 2.5 years after discharge. And say I'm hoping to qualify for an FHA mortgage. I'm doing a stay-and-pay with my current mortgage (underwater by $20K - about $200/mo of a 2nd mortgage) in a property that homeowner's association rules prevent me from renting out. In order to qualify for a new mortgage, I have to have a plan of what I'm going to do with my current mortgage. I'm not "allowed" to buy a new house and bail on the old one, or I won't get approved or will be committing fraud. So... in order to get qualified for a new mortgage, I need to afford mortgages on both properties - old and new. But I need a plan for my old mortgage so lenders don't think I'll buy and bail. Right?

Smart or stupid: Aggressively pay down the $20K 2nd mortgage (I'll actually be able to do that once my other debts are erased), which will bring my mortgage balance about even with, maybe a little less than, current market values. Then list the house for sale (who knows - maybe by then, for a profit, or to make back some of the $20K). Avoid foreclosure and short sale - no negative public records.

I hate to throw away $20K, but we have two young daughters, and we need/want as much stability for them as possible. Rentals around here that would be ideal for a family are going to cost as much as or more than our current mortgage payments, so it doesn't make sense to me to move only to pay the same thing. And I don't want to move to a slum area with my daughters just to save a little money. I know I'm not legally responsible for the mortgages anymore once discharged, but in order to get into stable housing for my kids' futures and schooling years, it seems like the hard way - paying off debt I don't have to pay and then selling the house - might be the best way for our family. Anybody btdt? Sell a house that was IIB (not via short sale)?

Thoughts?

[NoMoreCards]

I considered this as a option during my Ch7 BK as well, but I found that it would be really difficult to get a second mortgage with one still being paid. It CAN be done, but I found something else that worked better for me.

My 401k allows for "hardship withdrawals" to purchase a principal residence, this money does not have to be repaid.
I also borrowed some money from other sources. In the end, I found a foreclosure in a nice area and paid cash for it. Granted I have money that has to be paid back and am working on that now. In 2.5 years, all money will be paid back at 750 Month, instead of close to 1500 a month for the mortgage I bailed on.

You can find nice foreclosures, at amazingly cheap prices. Keep looking, some are diamonds in the rough, in great areas. Remember, foreclosure happens to all walks of people. (nice areas and slums)

Most financial experts say not to take money from a 401k, there is much debate on this. However, I may have less of a 401k retirement account right now but I also have a house I can live in well past retirement.

The place I found, is 1 acre, 3 bed, 1 bath, basement, fireplace, 2.5 car detached garage. Built in 1901, but plumbing, windows, electrical, roof have all been done in the last 10 years. We paid 32K for the place, and no matter how low prices drop we really cant lose.

[pinkpeanut01]

Wow. That's a fantastic deal. Good for you! Sadly, we don't really have a 401k to raid. We have some IRA accounts, but there's not enough in them to really help much. I just keep flip-flopping on what to do... but wow - $32K... you're right! You can't lose!

[NoMoreCards]

Just keep your options open, is all I am saying. Think outside the box, set as goal and find a way to make it happen. Some on here have purchased a home doing a land contract, so you get out of the "qualifying" for a mortgage. You have many options, and make sure you look at them all before working to toss that 20K.
Best of luck to you.

[DebtEnder]

Are you wanting to move to a better area in 2 years or so? Just wondering, since it seems your only slightly underwater, at least by your reckoning. And yes I do know someone who sold as house 18 months or so after bk7, made about 5k after balance, agents paid. Since lien was paid in full he bought a new house with FHA with no real issues whatsoever.

Just curious as to the motivation to move. As no norecards said it could be possible if in a year or so pay down the 20k but instead save it and live rent free to save more it could be possible you could find a house to buy outright for a bit more. Also land contracts, USDA backed loans if in a rural, semi rural area and other "creative" financing should all be looked at.

[debee]

Aggressively pay down the $20K 2nd mortgage (I'll actually be able to do that once my other debts are erased), which will bring my mortgage balance about even with, maybe a little less than, current market values. Then list the house for sale .... Thoughts?

Great advice already given. I wouldn't pay your second off just yet. Make sure you're right about the value of your property and the trends in your area. You don't want to pay off the second and then find out you're more underwater than you thought. Also, rather than aggressively pay down the second, you might want to bank it and stop paying the 2nd. Let them squirm a little. Then offer them a lump sum payoff to remove the lien. Lots of people here have done it successfully for 5 or 10 cents on the dollar. Just ideas. Wish you the best outcome.

[dspii]

It is a sticky situation at best....I am living the nightmare myself. I have a house I bought in 1998 only to find out that today it is worth $25k less than I paid for it 13 years ago. I have since moved across country and am trying to unload so I can get a mortgage at the 2 year mark. No mortgage company will talk to me until its gone....so I am in the middle of a stressful short sale to keep a foreclosure off my back. Hopefully the rules change soon.

[bbanana]

I was told by a short sale realtor today that apparently short sales are in effect showing as foreclosures(or equivalant). I am not sure if this is correct..I also heard that if you walk away from a house that you BK'd(Chap 7)on anytime later, you can have the foreclosure removed from your credit report if it gets dropped on your credit report as you took the hit when you BK'ed and started the ride through on the house....
We are trying to figure out what to do with our home as well and if short sales are no better than a foreclosure, hell with it I will walk...that is if I can get the foreclosure taken off the credit if it shows up..
Again, I don't know if any of this it true which is why I plan on calling our BK Lawyer later this week..:-)

[Snax]

@bbanana, for clarity sake, a foreclosure record typically does not show up on credit if IIB, but it IS public record and will be discovered by mortgage underwriters. There's no way to hide it, so you need a plan to deal with it.

[pinkpeanut01]

Great advice already given. I wouldn't pay your second off just yet. Make sure you're right about the value of your property and the trends in your area. You don't want to pay off the second and then find out you're more underwater than you thought. Also, rather than aggressively pay down the second, you might want to bank it and stop paying the 2nd. Let them squirm a little. Then offer them a lump sum payoff to remove the lien. Lots of people here have done it successfully for 5 or 10 cents on the dollar. Just ideas. Wish you the best outcome.

I guess I lost track of this post, but saw it again this morning after a recent bump. I do appreciate all the advice, and debee, this is one option I had not heard about yet, and it sounds like a great one. The caveat, however, is that my 1st and 2nd are with the same bank. So I'm not sure if they will squirm or not. ?? But it's definitely worth consideration and looking into. Thank you for the idea.

@DebtEnder - It's very refreshing to hear about someone successfully selling post-BK and getting an FHA mortgage. We want to move because my husband has a bit of a commute at the moment, and we're living in cramped quarters. We'll deal with it longer if we have two, but the thought of spending more than two years here gives me chills. We'll definitely do what we have to do and what is best for our financial situation (no more throwing caution to the wind, as in the past), but no matter what happens, I don't want to be stuck. I want options. If it's best to stay, we'll stay, but I hate knowing I CAN'T go. Thanks again for the response - it definitely helps.