My Home is Underwater, and I Want a New Home!

In the wake of the 'Great Recession', many homeowners were left with homes that were no longer worth the mortgage they paid for the home. For example, if you paid $500,000 for your home (Home 1) with a $400,000 mortgage, and Home 1 is now worth only $300,000, you are 'underwater'.  With so many underwater homes, the number of short sales increased dramatically in the past 5-8 years, to the chagrin of many homeowners in neighborhoods where property values were effected. No neighborhood was safe from this, and consequently, short sale and foreclosure prices met market value (so many of these sales caused regular prices to factor in these distressed prices) and there were no longer 'good deals'. These sales became a burden, instead of an opportunity.

Here in 2016/2017, now that less foreclosure inventory is coming on the market, and short sales are no longer 50% of all sales, the market has improved greatly. However, there are still many homeowners waiting on the sidelines to sell, but don't want to risk their credit to unload their property (by using a short sale option).

If you are looking to buy a New Home, but are currently strapped down by a mortgage, this information is intended to help you.

Disclaimer: I am not an attorney nor a mortgage broker. Please seek professional advice before taking action on what I write. Or call me, I'll hook you up with the right professionals.

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How Can I Set Myself Up Now for Tomorrow?

Many homeowners cannot afford two mortgages at once, so trying to purchase a New Home with Home 1 acting as a liability (see more about this below in 'My Advice For You'), is a recipe for disaster. This is especially true if you are trying to pull one over on the bank by purchasing and selling simultaneously. When buying New Home, the lender will check your financial records until as close to a couple of days before closing. This causes a big problem for those homeowners. Banks will see Home 1 (liability) as debt.

My Advice For You

For a year (or two), live with your parents or a friend, rent a different home, and get out of the first property as quickly as you can.

You see, when qualifying for a mortgage, banks look at your debt-to-income ratio (DIR); in other words, how much debt (car payments, mortgages, recurring bills, student loans, etc), as compared to your income (all assets, income, and other cash flow). Your mortgage on Home 1 will be considered debt until a bank can see 1-2 years of proven rental income on the property, and then they might not even forgive the whole amount of the mortgage, but possibly 75% of the income from the rental to offset the debt. However, now you can avoid a short sale, build equity, AND buy a New Home in a couple of years (instead of waiting three to five years for your credit to improve after a short sale).

Once a couple of years pass, then you would keep Home 1 rented, and then work to qualify for a New Home with far less debt on your personal balance sheet.

In the meantime, and for good practice, you should make sure to keep your debt low and credit high, regardless of your hopeful purchase situation. Some ways to do this:

• Buy a car outright, instead of leasing or financing (used cars work great in this case);
• Pay off credit card debt and student loans if you have the cash (the interest rate on this type of debt is excessive, so getting rid of it for a much lower interest rate liability is worthwhile);
• Cut down on expenses, with things such as coffee at Starbucks, eating out excessively, and other items that would increase the credit card utilization, or the ratio of money spend to your credit line;
• Avoid new loans or lines of credit of any type up until closing (or in general in order to maintain satisfactory credit).
  

Alternatively, there are other ways out of this. For example, if you are married and Home 1's mortgage is under only one spouse's name and not both, then that debt is only on one of the two of you. Buying might then be possible if the alternate spouse has sufficient income to buy a New Home. Note: This could be considered defrauding the bank, so I will not recommend it, and I will make sure to disclose it.

Your Action Steps

1. If you are in an underwater scenario, and you want to get out of Home 1, leave it now;
2. Rent Home 1 to a qualified tenant, and become a short-term landlord. Try to get as much rental income as possible (hire a good Realtor, as market value should be your minimum rental price);
3. In the meantime, live with your parents or friends for two-three years, or find a rental as a tenant;
4. After a year or two, work with a quality mortgage broker to see if that rental income from the past few years will offset the debt (your mortgage, taxes and insurance) on Home 1;
5. Buy your New Home without having to deal with a short sale on Home 1;
   
6. After a few years, some added equity, and possibly enough money in the bank to pay off the full mortgage and closing costs, you can sell Home 1.
   

These simple steps will get you well on your way to buying a New Home, if you are stuck in your current mortgage. Families grow, situations change - the more prepared you are now, the less surprises will come your way later.

Be prepared, stay educated, make better decisions.

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As always, I am thrilled to have a medium to pass on my experience, but also excited to help advise you on any level, without any obligation!

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