Underwater move-up strategies

Q: My wife and I live in a great loft that is now about $100,000 upside down. We're going to have a baby, and need a house. But we're thinking we'll either have to short-sale our loft or rent it out for awhile. We can't qualify for two mortgages, and we've been told that if we do a short sale, we won't be able to buy for another two years. Other than just renting, do you have any suggestions for how we can buy another home?

A: I understand your dilemma. As a Mom, I want to assure you that babies stay small and take up little space for about a year. Their accoutrements, however, can dwarf their little bodies. I've seen friends stuff 8-seater SUVs with the "fixings" for their 7-pound babies: it's easy to go overboard, and you'll find yourself using the same few items to the exclusion of all the rest.

Be careful about how much stuff you buy for your baby's first year, and you might be able to delay your move until your place recovers some value, depending on how rapidly the market is recovering where you live.

Need-to-knows

If you do decide to rent your place out, the average lender will give you "credit" for no more than 75 percent of the rent toward your income when it comes to buying another place. But, of course, they will "charge" you with 100 percent of the mortgage, property taxes, homeowners association dues and other expenses associated with that property. You might already have done that math, to arrive at the conclusion that you can't qualify for two mortgages, but it is a fact to be considered when determining whether to rent out your loft.

Now, in terms of how soon after a short sale you can buy again, the current rule is that you cannot obtain a federally insured loan (like FHA or VA, or a conventional loan that is backed by Fannie Mae or Freddie Mac) for two years following a short sale. However, these guidelines do change, and some speculate they will change over time as the numbers of would-be American borrowers with short sales in their recent pasts increases.

Additionally, some lenders will lend to borrowers with recent short sales if they have a good downpayment, income and a willingness to pay a slightly higher interest rate.

There's really nothing wrong with renting for a two-year period, though, if that's your concern. You might even know better where you want to buy, in terms of school districts and the locations of extracurricular activities and family supports (or the need for distance from extended family members, as the case may be!) when your baby is a couple of years old, compared to right now.

If you're expecting right now, it might also be sanity-saving to short-sell your condo (if you decide to go that route) and just rent for two years while you enjoy your baby's many milestones, stockpile some cash and repair your credit. ...CONTINUED

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