Tag Archives: underwater homeowners

Short Sale, Buy and Bail, or Rent Your House and Buy Another?

Underwater mortgage

Photo credit: Joshhphoto, Flickr

Since the housing bubble burst, thousands of people have found themselves in the position of owing more on their current house than it would sell for in today’s market. A recent article from Time Magazine indicates that over 11.1 million homeowners are currently upside down in their mortgages, and that this number is growing at an alarming rate.  If you’re one of the unfortunate crowd who finds themselves in this situation, and you either need or want to move, you’re likely trying to figure out how to get out of your current house without losing any more of your hard-earned cash in the process. Here are three common strategies that many people in this position consider:

1) Doing a “short sale.”
A “short sale” occurs when a bank agrees to let a borrower sell their house for less than the outstanding mortgage, then forgives the rest of the debt. Banks may be willing to do this in scenarios where, by their calculations, they stand to lose more money by going through a foreclosure process than they would by doing a short sale. However, part of qualifying for a short sale involves submitting a “letter of hardship” that explains why you can’t continue to make your current mortgage payments or pay the difference between your home’s sales price and your outstanding mortgage balance in the event of a sale. Simply wanting to buy another house, or “needing” to move for reasons that are essentially a matter of personal choice/preference, generally won’t cut it.

2) Buying a new house before walking away from the first, a.k.a. “buying and bailing.”
The term “buying and bailing” describes homeowners who walk away from their current house with its upside down mortgage, but purchase a new house at a better price and lower interest rate before their credit tanks.   These homeowners typically tell lenders that they will rent out their old house (sometimes producing fake rental agreements), but never actually find a renter, and stop making mortgage payments on the old house as soon as their new house closes.   The problem with the “buy and bail” is that lying on your loan application (for example, about having a renter when you actually don’t) and producing false documents is mortgage fraud, which is a federal offense, which, according to a recent FBI warning, is punishable by “up to 30 years in federal prison or $1,000,000 fine, or both.”

3) Renting the current house out, then buying another.
Renting your house and buying another may be easier than you think. While lenders have tightened their guidelines surrounding this practice due to the recent spike in “buy and bail” transactions they’ve seen, if you have a fair amount of equity in your home, this may be a viable solution. Here are typical lender guidelines for renting your current house, then buying another.

  • You must qualify for both mortgages, which makes sense, because you’ll be paying two mortgages.  A central issue is whether you’ll be able to count your rental income from the current house in your income to debt ratio (see above). If you have at least 30 percent equity (for conventional loans) or 25% equity (for FHA loans) in your current house, you can include rental income on your mortgage application.
  • You must produce a signed lease on the current house, typically for a one-year term.  The lender may require that the renter has already moved in.
  • Some lenders require applicants to show that they have cash reserves to pay for the mortgages for 6 to 12 months.

If you are fortunate enough to have a good savings account and 30% equity in your current home or enough income to support two mortgages, then renting out your current home and getting into a new house at a lower interest rate, might be a viable option – and it also could be a sound investment.

| September 11, 2012 More