underwater 2nd home.

[strsmnky]

I bought a house in 2009 and refinanced in 2013 through an FHA streamline. In December of that year my wife and I got new jobs about 70 miles from home and we moved and purchased a new home. The old house was worth about $20-30K less than we owe despite having invested lots into it. We rented it out for about 6 months, but that was a nightmare. Rent was never once on time and then the guy lost his job. Luckily they moved out the next month. We lost rent for 2 months, but c'est la vie.... right? It could have been worse.

Now I just want to short sale the home to get out from under it. The bank has the paperwork and says they'll give me an answer in 30-45 days. I almost didn't pay the mortgage last month. I did at the last minute because I am having a hard time going over that ledge. I have never missed a payment on anything and my credit score is in the 800's. I may not pay this month. The house is vacant and listed.

I talked to a lawyer that said there's no way to tell what the bank will do and said it was up to me to continue to pay or not.
I hate to destroy my credit, but at this point I almost don't care. What I do care about is the bank foreclosing and then coming after me for the mortgage, their legal fees, and all the rest.

I know short sales can take a long time and I'm trying to divorce the emotion of the whole thing and look at it as simply a business decision. I don't even know if the bank will say "yes" to a short sale. I am open to a deed-in-lieu or anything really to get out from under this house, but I am worried about them coming after me or my assets (particularly my current home!) I basically live check to check now because I have been paying 2 mortgages and have a new baby. My wife and I have good, stable government jobs, but we cannot swing 2 mortgages.

I read conflicting stuff on the internet and know that some of it is state specific or on an individual basis. This whole thing is stressing me out like crazy! If this was my primary residence I would just keep paying - underwater or not, but that's no longer the case. Any advice?

I'm in New York State.

[Another Reader]

The internet is not the place to seek the advice you need.  You need to speak with an attorney in New York State that is familiar with short sales and lender recourse in your state.

Can you come up with the difference between the loan balance and the net proceeds of the sale?  That's the way to handle this without ruining your credit.

[strsmnky]

I do not have the money to cover the difference. The attorney that I spoke with did not answer these questions to my satisfaction. Perhaps I need to find another attorney. He directed me to find a realtor, list the property, and request a short from the bank which I did. The rest he took a sort of "we'll see, it depends" type of approach and suggested I talk to a CPA.

I am OK with my credit taking a hit. I have come to grips with the fact that it will. I'd like to minimize how much I get hit, but in the end, I don't need a loan. I've got another house, I am not into cars or having a new one every 5 years, and I make plenty to cover my bills (and save some) with the exception of this other house.

Honestly, at this point I'd let it foreclose if it meant I'd be free and clear. My realtor says just "give the keys back," but I am fairly certain it's more complicated than that. It's not my primary home, but it was when I purchased it and was when I refinanced it in 2013.

Don't worry... I'm not going to take what I'm told here as gospel and bet my future on it, but I am looking for advice from those familiar with the process or who have been in my situation.

[Cococola]

I just registered today, because I want to help answer the question.

If you are not worried about your credit, you should stop making payment. If you keep paying, bank may not work with you in terms of short sale or deed in lieu foreclosure.  Any of these two will lower your credit.

In the process, you should ask the bank to forgive you the loan(difference). if not, you leave the bank an opportunity to go after you down the road.

If the bank does forgive you, you may receive 1099A, in the eyes of IRA, loan forgiveness is treated as income even though you have never received the money.  Two way to get you off:
1 bankruptcy, 2 financial insolvency - meaning - your liability exceeds your assets, such as if you add all your asset say 200k, your liability including this loan is 300k, they forgive you 50k, you don't owe any taxes at all.  Please feel free to call IRA and they can explain to you better, although be prepared that everyone may give you a different answers, but you will get it right from IRA or your CPA.

Most likely they will not go after your current house, because if you file bankruptcy, most counties in NYS have exemption up to 300k for a couple.

Best luck to you and your family!

[strsmnky]

Thanks for your advice. I'd like to avoid bankruptcy if at all possible. If it was the only way to keep my current house, I would do whatever I needed to do.

I would rather not pay taxes on the deficiency, but at this point if it meant that I'd be free and clear, I'd do it. I'm not going to pay November and I'm going to talk to another lawyer. I worry that I'll have to get caught up and rent it out still at a loss, but the rational person in me thinks that if I stop paying, eventually I'll be able to enter into some kind of agreement whether that be a short sale or deed in lieu.

[Setters-r-Better]

It sounds to me like you should just find a better tenant, and give it more time for the value to appreciate,  mortgage to pay down,  and possibly save a little to bring to closing and pay off the deficiency.  How much is mortgage payment and how much can you rent it for?

[strsmnky]

Mortgage is $1200 and I think I could get $1100 monthly. Even if I can put $500 a month away for a better paydown hoping for the right tenant seems like a gamble which will drag this whole process out for years and years - potentially with far worse outcomes.

[Handlebar Harry]

Maybe try to doing owner financing. You can charge more rent, demand a larger security deposit/down payment, and have the payment schedule balloon at the point where the home value meets the total debt owed on the mortgage. I would suggest a better lawyer who specializes in this though.

You get to save your credit and provide a house for someone who wouldn't be able to get financing otherwise.

...just a thought.

[fxsts12]

Use a property management company until it is established and you dont have to deal with renters. You should evaluate the difference at the point of having a loan of over 100 percent financing which you can't get anymore.  Take into account depreciation and you should break even sooner and have tax breaks on top.  Your loss is limited to what you put in but the house will be paid for by someone else over the next 30 years. 
We had a similar situation and gain 10k in equity every 4 years.  That is what changed my mind. We lost $200 a month for a few years but the breakeven is the only difficult part.  Once it is profitable then you don't have a discussion and it will return paper losses and cash flow.

[BrettGoldsmith]

If you have a FHA loan and it is being processed through the pre-foreclosure sale program, the deficiency judgment should be waived if the short sale is approved. FHA does not pursue deficiency's to my understanding and I have facilitated roughly 1,000 short sales. Have you had an approval to participate issued? If so, this would mean it is being reviewed as what people refer to "FHA Short Sale". Deficiency judgments come down to if the state is a deficiency state which I believe NY is and the type of program the short sale is being processed through. FHA, HAFA, there should be no deficiency judgment. If it is a traditional short sale the deficiency judgment could still be waived per the short sale approval. If it is not waived you can always try to negotiate to have it waived.

If you have any questions feel free to shoot me an email at Bgold@acgnow.com

[strsmnky]

Bret,

Sorry it took me so long to respond. I get busy with work and the kid... you know. Yes, it is an FHA loan. Today I received a notice of default after not having paid November. No approval to participate yet, but I am hoping during the next week or two. I seem to meet the criteria on paper so as long as there's not a whole lot of case by case basis it looks good that I'll be able to participate. At 88% (which is what they will require at first) and then real estate and lawyers fees I'm well within the market value of the home so in theory everything should go. After 60 days it says they'll require 84%, which after fees and such leaves the total cost $15k below where the house just appraised. The waiting is just tough and then letters like the one I got today make it that much harder. I have never defaulted on anything before.

I did read on the HUD website that if I meet the FHA criteria then the deficiency should be waived whereas with a private lender NY would allow them to seek a judgement.

fxsts12 - if I end up losing the short sale as an option, I probably will go with a property management place to lose more money on front end for a [hopefully] better outcome in the long term.

Thanks to you both!

[MB1443]

It sounds to me like you should just find a better tenant, and give it more time for the value to appreciate,  mortgage to pay down,  and possibly save a little to bring to closing and pay off the deficiency.  How much is mortgage payment and how much can you rent it for?

1

Exactly

[strsmnky]

Update: I have been granted permission to short-sale the house. If after 4 months it doesn't sell, they'll take a deed-in-lieu. My credit will have taken a hit, but I'll be in a better position with positive cash flow and no debt other than my current mortgage.