Bailing on underwater house

DEAR BENNY: My self-employed son and his new wife built a house several years ago at the top of the market. Last year, they decided to take advantage of slightly depressed real estate values in another state, and contracted to build a house there. The first house was put on the market at substantially less than they paid for it. They got no offers until someone asked to rent it with an option to buy.

Under the supervision of a property management agency they signed a one-year lease with the renter who recently defaulted in December. The house is now vacant, and despite their substantial downpayment cannot be sold for anywhere near what they owe on the mortgage.

After a year of paying two big mortgages, they are desperate and almost ready to sacrifice their credit to a foreclosure. What is the best way of getting rid of the first house under these circumstances? --Kris

DEAR KRIS: Because this is really no longer their principal residence, they have more problems than if this were their main home. But here are some possible options. First, they should talk with the lender on the first home. Can they work out a loan modification so that the mortgage payments will be reduced -- at least temporarily? Will the lender accept a short sale, so that the house can be sold at a more realistic price?

Will the lender accept a deed in lieu of foreclosure? This means that your son and his wife will deed the house back to the lender so that no foreclosure takes place. This can be a win-win for both sides, because the lender does not have to incur a lot of costs for the foreclosure and your son will get rid of the house. I assume that he is current on his mortgage payments for the first house.

Finally, if all else fails, stop paying on the first home's mortgage and let it go to foreclosure. However, your son should discuss the situation with a local lawyer. Most states allow lenders to go after their borrowers for the deficiency, which is the difference between what the lender received at the foreclosure sale and the current outstanding mortgage balance. If state law permits, the lender could sue your son, get a deficiency judgment, and then go to the state where he now lives and try to collect on that judgment.

DEAR BENNY: I know little about buying and selling real estate and need your advice. I purchased a home in October 2007 with a downpayment of $200,000 cash (all of my family's savings). The house was worth $335,000 then. Now, it is worth $245,000. I have been making a monthly payment of $1,245 on the $135,000 I owe the bank for a 30-year fixed loan at 6 percent interest.

My real estate agent helped me buy this house from the owner who promised "to fix" whatever it needed repaired. Unfortunately, I have had a number of problems.

On rainy days, the house floods. When it wasn't raining I installed an electric pump and connected it to a water hose. So, whenever the rain comes, I place my head under the crawl space to check if the water has risen to at least 2 to 3 inches. Then I plug in the electric cord to get the water pump to start. The owner denies knowing of flooding problems.

Another small problem is the electric. Even though the house passed the city's inspection, there are short-circuit issues. I called the owner about this problem and he said he would come by and "fix it." After long waits, the owner did come back to correct the problem, but a day or two after he left the problem returned. ...CONTINUED

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.