How to downsize after a short sale and lay offs?

[MoneyStuck]

My husband and I are both 29 and did not make wise investments into property when bought our first houses.  We are now desperately trying to clean up our financial mess and our in a bigger rut than ever. 

I bought my first house at 21 for $140k and had to relocate for work at 22.   After years of suffering with renters who could not even pay half my mortgage payment my short sale(with missed payments) was finalized in Nov of 2012 for a sale of $49k.

My husband bought his first house at 21 for $180k and now we in a similar situation where the renters cannot pay as much as our mortgage.  The house value is $140k and we owe $165k.

We got married and bought our current house for $275k in Oct of 2011 (at the time our net income a month was $5600 combined).  We invested $50k in repairs into it thinking this would be our forever home.  Our realtor feels we can sell it for $290k.  We currently owe $200k.

3 months ago my husband was layed off.  We have 2 children under 3, and a third on the way.  I work from home.  The smallest house we could even get into would have to be a min. 3 bedroom as I required to have a dedicated office for my job.      He has no degree and has applied for over 300 jobs in the past 3 months.  He has one potential job making $12 an hour but that is a maybe and wouldn't be open for another 3 months.  The cost of daycare for 3 kids would negate him even working for that pay.  I net $2900 a month income and our mortgage just went up to $1600 a month due to an increase in our tax assessment.

We live tight, don't eat out, walk where we can, don't spend money on ourselves.  We only spend $300 a month of food and I even make our soap and laundry detergent in efforts to save money.  We have one car with a payment for $220 a month and our utilities needed to live(no phone, no cable)  run us $1000 a month for this house that we are in.  No credit card debt.  Without counting emergencies or even buying toilet paper you can see we are living upside down now.  Our savings will only last us another few months.

We want to downsize but can't get a loan for another 2 years as per the conditions of the short sale.  Even if we sell our current house first the rent of a 3 bedroom apt is $1300 in my area.  My husbands first house that we still own is a 2 bedroom one bathroom house.  So that's not an option either.   The bare min cost for us to get into a house that could accommodate us is $175k.  We won't have the cash after selling this house to make it happen.  Even if I borrow from my 401k which has $30k in it we won't make it. 

I'm lost.  I have no idea how to get out of our financial rut.  Any advice would be appreciated.

[Watchmaker]

You need to reconsider the things you think are non negotiable. 

How big is your husband's first house?  I'm guessing that, however big it is, there are people on this board happily living with the same number of people (or more) in a smaller footprint home.

Without having the details, that seems like the natural place for you to consider living.

[Numbers Man]

First of all, don't panic. You seem to have a lot of anxiety because of previous short sales. You have savings and you will get unemployment to help you.

There are temporary agencies that can find him full time temporary jobs plus if he hustles every day looking for work he should land a permanent full time job.

It sounds like your emergency fund is not as high as it should be and needs to be addressed once your Husband is back on his feet.

[MoneyStuck]

Agreed that our Emg fund was not what it should be.  The short sale caused us to pay $20k in taxes this year due to the debt forgiveness being treated as income.  So we took a big hit there. 

As for our non negotiable's we need a 3 bedroom, in this area, and in a safe neighborhood with decent schools.  My husbands first house that we still own is a 2 bedroom.  We need a bedroom for us, one for the kids, and in order to keep my job I have to have a dedicated office.  So a 3 bedroom is the min.  That runs us between 165k and 200k before closing costs depending on the quality of the schools.  We will be downsizing from a 6 bedroom 4 bathroom house, so we are cutting as low as we really can on size.

I'm not to panic yet but am close.  LOL.  I keep holding out hope for employment but like to plan for worst case scenario.  I would like to make sure I never run into this situation again.

[Frankies Girl]

Is the house you already have that is a 2 bedroom have a dedicated dining area, or even a large closet? A garage? Something that could count as your office space other than an actual bedroom? I'd ask if there is a restriction on square footage and whether that office space clause is truly requiring a full bedroom as that seems to be rather odd. (if you are writing off office space for tax purposes, then there are very strict parameters that have to be met, but it is my understanding that the space must be "dedicated" usage only and not multi-usage to fully qualify, so not sure what the parameters are for your employer's perspective).

In any case, you could still make the 2 bedroom house work - you and your husband's "bedroom' is the living room (fold out couch, or just put your bed in there), the kids get the master and the office is the second bedroom. It may be awkward for a little while, but it would be the best use of space while allowing you to conserve money, and once your husband finds a job and you sell the other house and build up your savings and emergency fund, you can look for a bigger home in a few years... meaning that the school districts don't have to come into play for at least 2 years if both of your older children are still under 3 years.

[Hadilly]

xposting with Frankie's Girl here...

How about setting up your office in the garage or basement? Why not use your bedroom as an office, putting a lock on the door, and you sleep in the living room on a pull-out couch? I'm assuming you aren't seeing clients at your house.

One of the things that is so great about mustachianism is questioning your assumptions.

It sounds like if you sell your current place, you would clear 70K or so. Can you rent it for enough to cover the mortgage instead? If you do sell it, wouldn't that replenish your emergency fund?

Do you qualify for unemployment and food stamps?

A temp agency is a great idea. Or, as people are fond of suggesting here, can your husband take care of children in your big house as a way to generate cash in the meantime?

Your situation sounds panic making, but if you can sit down and make a huge list of possible things to do, that may be a calming activity that also points out a way forward. It sounds like retrenchment is order in the near future.

[Numbers Man]

Sounds like you didn't have an attorney represent you on the short sale. But congress enacted a law that expires at the end of 2013 that debt forgiveness is not taxable through 2013. You need to see a CPA that specializes in taxes to see if you can file an amended return and get your $20k back from Uncle Sam.

[ZiziPB]

@Numbers Man, I believe it's not taxable only if it relates to the sale of the taxpayer's principal residence.  The OP moved out of the house several years ago and rented it out so it was not her primary residence when it was sold last year.

[MoneyStuck]

It does have a garage but it's not temperature controlled and that would miserable to work in.  No dedicate dining room.  Just a spot in the living room for a table and very tiny closets.  The house is 1000sq ft.  But I can see the creative way of making the living room the bedroom for now if it comes down to it.  Just would want to use that as a last resort.  Which we are getting closer to.

We don't qualify for food stamps and our unemployment ends at the end of next month.  Just in time for the Holidays.  :) 

I had an attorney for the short sale.  That was a $3k waste of money I found out.  The law doesn't apply to me since I had not lived there in 5 years the debt forgiveness was taxable.  I had a CPA look at my refund and they politely said "You're screwed, pay the IRS."

We have entertained the idea of a "Daddy daycare"  but people are very hesitant to have a male watch their children in todays society.

In the end no matter what we need to revamp the way we live so this is NEVER an issue again.  I would love to get into a smaller footprint house that we could buy for close to cash, and make sure I keep a 2 year emergency fund available.  These have been hard lessons to learn over the past few years but I hope to grow from it and live a more financially conservative and stable lifestyle in the future.

I appreciate the input and advice so far.

[dadof4]

Another thought. You might want to convert that garage in the smaller house in to a bedroom (or two, if it's big enough). If your husband is handy and still hasn't found a job, he could lower the conversion cost down.

How much rent can you get on your current home?

Is refinancing possible? Rates are pretty low right now, and you might be able to pull some equity out this way to get you by.

I personally wouldn't sell your "dream" home. I'd rent it out, and move to the smaller home for about three years, even if it means sleeping in the living room. After that time, you will have built up some savings, and hopefully the housing market rebounds enough that you aren't underwater.

[MoneyStuck]

We would get little to no return on any updates or upgrades we do to the smaller house.  So I would be apt to live creatively over investing into the house.  I have learned finally to not waste money on temporary comforts.  LOL

We could rent our current house for around $1800 which might leave us a profit depending on insurance costs and nothing happening to the house with renters.  A possible but scary route.  We would not have the cash for a downpayment on another house though or emergency funds.

As for not selling our "dream house"  I think thats the way to go for us no matter what.  We could rent it for our mortgage payment but we have found that over the last few years living here we very rarely use 2 of the bedrooms we have and a formal living room is just a waste of square footage for us.  We love this house but we would love a smaller house with the same setup minus 1000 sq ft as much.  And we wouldn't be wasting money paying for utilities for those rooms as well.

I was hoping there was a loan out there for people in my situation but it seems that is not so.  I would love to get a house for $175 and and have the mortgage on $100k(so I don't have to borrow from my 401k)  We would be able to do a 15 year mortgage and I could pay it off even sooner which would let us role more money into 401k's for retirement early.  We looked at building on land my parents will give me but we need a loan for the same amount to make that happen as well. 

If I had known before the short sale how detrimental it would be to me, I would have never let it happen.  But hind site is 20/20.

[lysistrata]

Hi Moneystuck, it sounds like a stressful, yucky situation! But as others have pointed out, there are ways around it if you think creatively.

Regards the house you are currently living in, since it's got six bedrooms and you only need three, why can't you rent those rooms out? Contact your local university about renting to foriegn students or professors, or stick the rooms on AirBNB - that could be a great way to bring in some extra money NOW while you figure out what to do.

And, I wonder if you're husband has applied for so many jobs with no luck if he needs to look at his CV again - perhaps there's something in the application process he can be doing better. Has he contacted recruitment agencies?

Also, for argument's sake, does your job allow you to relocate to another area/country? This widens your options further. In NZ, where I live, if people can't find a job here, they go work in the mines in Australia - make bucketloads for a few years, then come back.

[MoneyStuck]

Hi Moneystuck, it sounds like a stressful, yucky situation! But as others have pointed out, there are ways around it if you think creatively.

Regards the house you are currently living in, since it's got six bedrooms and you only need three, why can't you rent those rooms out? Contact your local university about renting to foriegn students or professors, or stick the rooms on AirBNB - that could be a great way to bring in some extra money NOW while you figure out what to do.

And, I wonder if you're husband has applied for so many jobs with no luck if he needs to look at his CV again - perhaps there's something in the application process he can be doing better. Has he contacted recruitment agencies?

Also, for argument's sake, does your job allow you to relocate to another area/country? This widens your options further. In NZ, where I live, if people can't find a job here, they go work in the mines in Australia - make bucketloads for a few years, then come back.

We have talked about renting a room but we have an open concept house with hardwood.  With kids there is no volume control so it would be unfair to a renter.  We currently have my MIL and little brother in the 2 extra bedrooms.  We let them stay with us when they where going through hard times and will be moving into there apartment Nov 1. 

The renting of the rooms would be another creative way if we could work on soundproofing the rooms.

I have the luxury of being able to work anywhere in the continental US that I can get a good internet connection and have a dedicated closed off office space.  I am on the phone all day so it has to be quiet.   But my husband is very stubborn and will not move more than 20 miles from his parents.  If he would I would have moved to an area where the real-estate is much cheaper a long time ago.

My husband has no degree which hurts him, and daycare is $200 a week for two kids and $300 a week for 3, so whatever job he gets would mean kids back in daycare and he has to make enough to cover that.  That's where the job situation has become tricky. 

I work 50 hours a week roughly, am working on my MBA(company funded), and make custom cakes on the side so I am already stretched thin enough and I don't spend as much time with my kids as I want.  So a second job isn't an option for me either.

I vote sell current house. You should rethink what your dream house is. I have five kids, and we have 3 bed/2.5 ba. It is just right for the long term. We did have a 1350 sf house until my fifth child was born. It can be done. You could live in your smaller house and have a family bedroom. My kids prefer this setup when they are little anyway. Or, you could replace the garage door with an insulated one and then just use a space heater out there. My parents have done this very comfortably.

Do you breastfeed? If not, rethink it! It prolongs fertility and saves a lot of $$$ from not buying formula. Do you cloth diaper?

I was unable to breastfeed with my first two, who are both on milk and solid food now anyways.  I will try again with a third but the outlook is not positive.  We do not cloth diaper but thats is a cost savings I had not looked into.  Right now we spend $60 a month for wipes and diapers for 2 kids.  Cloth diapers might cut that down for us.  And I am very very done with children after the third.  LOL