Underwater Mortgage - Looking for options/suggestions

[KeroKat]

Hi All,
Longtime lurker and I finally have a situation where I could use some good advice.  So I currently own a 1 bedroom condo in Northern Virginia.  It’s been great, it’s been fun but I’m ready to move to a lower COL area where I could afford a small house so I can have a garden and a clothesline and a compost pile (my dreams are very small).  So why don’t I move, well, I bought in 2006, at the very height of the market and I’m still underwater…yeah….8 years later.

My original plan was to put the place on the market next spring because I figured I could pay down the mortgage enough to sell and not have to bring money to the closing.  But we lost a big contract at work and now my job situation is unstable.  I could probably scare up enough work to last until next spring but it’s no guarantee.  I’m undecided as to where to move but I’m investigating two job possibilities in Baltimore, neither of which is a guarantee and neither is a reasonable commuting distance from my current place.

So here are the numbers that I’m working with:
•   Original sale price 237K in 2006, currently owe
•   141K @ 5.25% - mortgage through VHDA
•   30K @ 0% - this is a down payment assistance loan from the City, it gets paid back when I sell
•   Recent sales in the building have averaged about 158-162K
•   Assuming I could sell for 160K, I would still need to pay down the mortgage to 130K because I need to pay the City 30K of the sales price
•   Taking out the 30K for the City, the sales price would be about 77K less than what I paid…this is the point where I want to start crying

Current Assets
104K – 401(k)
12K – Roth IRA
48K – Traditional IRA
11K – Taxable Account
24K – Cash Savings (we had multiple layoffs over the last 3 years so I consider this my layoff fund)

I make about 4500 a month and have been saving about 1800-2000 that I’ve been directing to my mortgage.  So if I just keep paying the extra I could get down to 130K in about 6 months or so.

The down payment assistance loan from the City requires the condo be my primary residence (and I have to sign an affidavit to that affect every year) so I can’t rent it out unless I pay back the city.

I see a couple options
1. Stay in the place and keep paying extra on the mortgage until I break even and sell for what I owe, hope that the job holds out long enough, then sell and move, still a loss but maybe the market will be better in the spring

2. Dip into one of my accounts and pay down the mortgage enough to sell sooner, would allow for more flexibility on job location but would  result in big loss

3. Pay back the City the 30K so that I could rent out the place and hope it gains value so the loss isn’t as big, the only issue is that the rent probably wouldn’t cover the mortgage and condo fee unless rents go up and I really don’t want to be a landlord, my mortgage, tax and condo fee is about 1600 a month and based on other units in the building I could probably get about 1450-1500 in rent

Any suggestions or options I haven’t thought of? 
Thanks in advance.

[malacca]

Don't pay the bank another dime. Mortgages are risk based - that is why mortgage rates are higher than savings rates.

The bank took a calculated risk and lost. They made their profit on the bets that didn't go sour.

Rent it out and keep the dough from the rental until the bank decides to take it back. Don't sign the next affidavit for the city. Never commit fraud (unless you are a financial institution in which you get a Get Out Of Jail Free Card). Having foreclosure is not illegal.

[plantingourpennies]

So here are the numbers that I’m working with:
•   Original sale price 237K in 2006, currently owe
•   141K @ 5.25% - mortgage through VHDA
•   30K @ 0% - this is a down payment assistance loan from the City, it gets paid back when I sell
•   Recent sales in the building have averaged about 158-162K
•   Assuming I could sell for 160K, I would still need to pay down the mortgage to 130K because I need to pay the City 30K of the sales price

Not to make it seem worse, but don't forget that seller pays RE fees and possibly other expenses (home warranty, etc) that are often negotiated for by the buyer.  6% on $160K is ~$10K... so you probably need to count on bringing more to the table if you're looking to sell outside of a distressed sale. 

[fodder69]

Well, the issue there would be if the OP wants to buy another house that foreclosure is not going to help, especially with tighter lending requirements these days.

You are really not in that bad of a position from what I see. You are not going to get back what you paid any time soon but that is water under the bridge.

You owe 171K and could sell for 160K or so. So you are only off about 11K which you have in cash, so you are not in a bad place.

For your specific options, I would go with 1 for now and just stay as long as you planned. You have enough cash to weather a layoff and your mortgage for a while. I also wouldn't pay extra at this point at all. Save the cash for now because of the job instability.

Option 2, if you do decide to sell just sell and pay what you have to then, don't pay your mortgage down before hand.

Option 3 would be good, when you do decide to take a new job or move, I'd look at the numbers then. At least in a condo being a landlord wouldn't be all that bad (lots less maintenance).

[Another Reader]

You are a candidate for a short sale.  If you lose your job or move to take a job, and you are underwater, that's a financial hardship.  Doing a short sale will affect your credit and you won't be able to buy for three years, but you will be able to buy again. 

You have a "sleeping second" on the property with the City.  It's in second position, so they will have to agree with you that they will receive nothing in a short sale.  If they don't agree, and the property goes to foreclosure, they get nothing anyway.  I'm sure the City has been through this with a number of other owners, because the units are selling for around $160k.  There is probably something in your loan documents about this.  Or you can talk to the City about the process.

I would not pay any extra on the mortgage at this point.  You need to max out your savings to carry you through the rough patch and if you have to short sale anyway, you won't get anything back.  Under no circumstances would I take money out of savings or retirement accounts to keep this property afloat.  You can never replace the tax advantaged savings and you need the other money.  If you save enough to pay down the mortgage later and the transition goes well, then bring the cash to the table when you sell.  Just pay the minimum and play the employment hand you have been dealt.

[skunkfunk]

If you go for a foreclosure or a short sale, I suggest you wait until you have a place rented in the new city. Sometimes they like to see a good credit rating, and if you go off ruining your credit it could cause problems. Once you have moved you can default on it, I think.

You might even be able to buy another place first?

[frugaliknowit]

Assuming the job market is decent within commuting distance of your condo, I would opt for #1, but I would NOT pay any extra on the mortgage.  This limits your options, in case things keep going south or you get an unbelievable job offer out of state.  Keep piling cash and keep it out of the condo equity.

One question I have is whether your line of work is "credit sensitive".  For example, if you tend to work for financial or insurance companies, your credit score is important so that a short sale or foreclosure can really put you "behind the 8 ball"!  If that is the case, I would rule out a distressed sale of any kind.

If your work is not credit sensitive and you get a lucrative out of town offer, I would see an attorney about a short sale.  Renting it out long distance with less than stellar cash flow is bound to be a headache and a loser.

[cheeseburger]

In your shoes, I'd go with Option 1.

When we were underwater and had to move for a job, we opted to save as much cash as possible so that we could write a check at closing to make up the difference.

Keep in mind that if you do a short sale, the difference in the amount of the sale and the amount owed to the bank may be considered taxable income. 

[babysteps]

You are a candidate for a short sale.  If you lose your job or move to take a job, and you are underwater, that's a financial hardship.  Doing a short sale will affect your credit and you won't be able to buy for three years, but you will be able to buy again. 

Depending on your loan documents, your lender, the laws of your state, and who you talk to at your lender, your strong cash position may mean the bank will require you to make them whole despite your mortgage being underwater (if so, you could still sell for less than you owe, but you'd have to make up the difference at closing).  Not sure if it makes a difference where that cash is (retirement/tax advantaged gets treated differently in bankruptcy, not sure about short sales) Short sales typically require very detailed personal financial statements.

I would find someone specialized/qualified to discuss this with (real estate attorney, real estate investor, borrower advocate, friend who works in a short sale dept etc).  If they charge, negotiate a fee in advance for their time, and get them all relevant info in advance so you get your money's worth.  Also, the bank may (or may not) be negotiable on the 'silent second' - your job situation would make them more negotiable, your strong cash position would make them less so (all else being equal, and assuming a bank can be reasonable...).

We (spouse & I) have been on both sides of many short sales in the last 8 years.  I would vote for moving on sooner than later - potentially listing as a "regular" sale (if you do qualify for a short sale, and don't plan on a mortgage right away, go for a short sale), make the bank whole at closing (even if that's money out-of-pocket), and relocate.  We moved to a much lower COL area 3 years ago and are *much* happier.  So I am biased :)

[MKinVA]

May I just add...you want to move to a lower COL area and you picked....Baltimore? It may be lower than NOVA, but Baltimore is not a low COL city. Check on local taxes, prices, etc. I think you are overwhelmed and don't know what to do. Like the others have said, stop paying extra on the mortgage and save cash in the event you are out of work for a little while. Focus on a positive such as deciding where you want to live and work in the future. Really investigate the new area and how much it costs to rent a place, are homes affordable, are taxes sky high (Baltimore), what are utility rates like?, are there people my age and my "bend" living there?? This can be an enjoyable hobby and distraction while you wait and see what the r/e market does this year. Dont make a decision in a panic.

[Numbers Man]

How about option 4? Stay put and find a new job.

[KeroKat]

Thanks for all the thoughtful replies.  I guess part of the issue is wants versus needs and the decision on where to move.  I really, really want a yard so that I can have a garden and I'm willing to move to make that happen.  But I'm not sure where I want to end up, right now I'm going back and forth with

Michigan
near family and cheap land- good
job market and weather - so, so bad

Smaller cities in Virginia or maybe Raleigh, NC
weather and cheap(er) land - good
no friends or family nearby - no so good
job market - need to do some research

I threw in Baltimore because of job prospects - I'm checking on transferring departments with my current employer because I could expand my job skills while figuring out where I want to move, I'm also doing some on-site support for a MD state agency and that might lead to a job because they're having a hard time finding people.  Since I won't make any money on the sale of my place I'll probably need to rent for a while to save up a down payment so it'll still be a while until I have a yard.

Sounds like maybe sticking with my original plan to stay until next spring as long as the job holds out is probably the best way to go and bank the extra money.  Since I technically have enough money to pay back what I owe I am not considering a foreclosure or a short sale at this time.  Also, my mortgage is through the state of Virginia meant for first time homebuyers and the city program is for moderate income homebuyers so I really feel I need to pay back what I owe to, I guess "pay it forward".  I've pretty much accepted that I'll lose a ton of money on this property, I was just hoping there might be a way that I hadn't thought of to reduce the loss.  Probably not unless there's a huge runup in housing prices (one can hope anyway).

[Thegoblinchief]

I'm 30-40% underwater on my current house, plus it would take probably another 10% of the value in TLC to sell (some half-finished projects that are still unsightly), so I feel you.

Currently our employment is stable  though DW has been getting restless. Not sure what we would do if we had to move, but probably a short sale or try to rent it out for close to break even.

[minougray]

Your situation sounds a lot like mine! Bought a condo in 2006 in Florida.  Mortgage is waaaay underwater, and I started renting it when I moved out to get married. Many people have suggested a short sale, but I'm just not comfortable with it. My strategy has been to split retirement savings and paying down the mortgage about 50/50. The 'stache keeps growing and I'm almost at the point where I can get rid of PMI on the mortgage. Once that's gone, rent will cover taxes+ condo fee + interest, so my out of pocket will be just principal that I have to pay back anyway.

I don't have any good suggestions to save money, but maybe you can try to take the long view and see this as a bump in the road (I'm trying... Not always successful, but trying!) MMM has a post somewhere that I found very encouraging - at mustachian savings levels, you should be able to conquer the debt pretty fast, then you are already set up for a higher future savings rate. Also, many others have made it to FI after a real estate setback. Check out James Collins story: http://jlcollinsnh.com/category/how-i-lost-money-in-real-estate-before-it-was-fashionable/

Hang in there - you are not alone!

[chasesfish]

Don't pay the bank another dime. Mortgages are risk based - that is why mortgage rates are higher than savings rates.

The bank took a calculated risk and lost. They made their profit on the bets that didn't go sour.

Rent it out and keep the dough from the rental until the bank decides to take it back. Don't sign the next affidavit for the city. Never commit fraud (unless you are a financial institution in which you get a Get Out Of Jail Free Card). Having foreclosure is not illegal.

I would not take this advice.  You still owe the money regardless of what the property sells for.  The loan is to you with the property as collateral.



I would go down the route of renting it and pay it off.  I think you should write the city a nice letter that says you can't afford to pay them back in a lump sum and have needed to rent it out.  Your rental is probably a lot better than breakeven, its just your profit is going into the mortgage balance.   I'm calculating your monthly mortgage carrying cost around $600/mo.

[Jennifer in Ottawa]

My first thought is to seek professional advice.

My second thought is that you should consider this condo a long term investment and treat it as such.  You bought high, don't sell low.  You presumably wouldn't do that with Mutual Funds or Stocks, so don't do it with your condo.

Pay off the 30k and rent out the property.  If you don't wish to deal with being a landlord, hire a property management firm to do it for you. Yes, currently reasonable rents would not cover the complete cost of owning the property, but they would offset those costs for the most part.  Over a sufficiently long period of time, rents would cover the mortgage and any difference between the purchase price and the eventual end price, and also cover the management fee.

Once the mortgage is paid off in full, continue renting and investing the rent until you have at least recouped that difference.  Then and only then should you consider selling, and by that time property values may well have recovered or indeed increased, putting you ahead of the game.

And no, you shouldn't default on either the city or the mortgage holder.  A debt is a debt, and a person of integrity always pays their debts.