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
I want to sell the house and get my deposit back, but I’m stuck with the $135,000 I owe. The house is quiet right now until it rains again. –Victoria
DEAR VICTORIA: I am concerned about your plugging the electric water pump in when the water level gets high. Make sure that you do not electrocute yourself; talk with a licensed electrician to make sure that you are doing it the right way.
You bought your house three years ago. I doubt that your seller will continue to correct the problems in your house, and from what you wrote, it does not appear that he does a good job when he finally comes to your house.
Because you want to sell your house, I suggest that you find a good real estate agent who can assist you. Interview several agents, and make sure they understand your situation and know the area. You will either have to correct the flooding problems or disclose them to potential buyers. Disclosure will clearly reduce the value of your house, but perhaps you have no alternative.
You owe $135,000 on your current mortgage, which means that you have a lot of equity in the house. I would suggest listing the property for $245,000 and see what the market will bring. You will lose a lot of your equity if you sell now, but if that’s what you want, you should move forward as soon as possible.
However, is that really what you want? Can you wait a year to see if the real estate market will improve? I remain optimistic that houses will increase in value, although I cannot predict when this will happen.
If you sell now, where will you go? Have you explored what it will cost you to rent an apartment? Do you know what the moving costs will be? Is it really worth the hassle and the aggravation of moving? Also, the mortgage interest and real estate taxes that you pay are deductible for income tax purposes; rent is not.
If you can afford your monthly mortgage payment, give serious thought to sticking it out as long as you can. Get a small loan to correct the water problems, but make sure you hire a licensed home improvement contractor to do this work.
DEAR BENNY: I am a first-time homebuyer. I was referred to a real estate agent who got me preapproved for a $250,000 FHA-backed loan without filing an application? The agent reports to the lender the price of the house I am bidding on. Is this normal practice for FHA loans or should I be aware of unseen cost other than the price of the house to be purchased? I do not want to be a victim of predatory lending and end up paying too much for the loan. –Harry …CONTINUED
DEAR HARRY: Run, don’t walk, away from that agent. I hope you did not give him any money up front.
I don’t know any lender that will make a home loan without receiving a written application from the potential borrower. The lender wants to make sure that you have sufficient assets, and a decent income, so that you can make the monthly mortgage payment.
Additionally, as of Jan. 1, 2010, lenders are required to provide you with a revised Good Faith Estimate (GFE) and a booklet prepared by the Department of Housing and Urban Development entitled "Shopping for your Home Loan."
If you did not get these two documents, your lender is not following the rules. I suggest you go directly to a different lender and drop all contacts with that real estate agent.
DEAR BENNY: I have a rental property that I had purchased in 2005. I was going to hang onto it and sell it a few years later. Since that time the real estate market has not been good. My property is now worth less than what I owe on it. I have only a first mortgage on the property.
In a previous article you stated that with having only a first mortgage the option of asking the lender to take back the deed and cancel the mortgage would be a lot easier. What sort of risk to one’s credit rating would this have?
I still have excellent credit but am unable to continue pulling out of savings to make the mortgage. Is there something that might be able to help me convince my lender to take back the deed? –Yvonne
DEAR YVONNE: I have given up trying to understand what motivates banks. If you have good credit and get the lender to take back the deed (this is called a "deed in lieu of foreclosure"), it will still have an impact on your credit standing — but not as bad if the property went to foreclosure. By taking back the deed, the lender is giving up a portion of the mortgage that you owe, and that information will no doubt be reported to the various credit-reporting companies.
Try to talk with the highest-ranking person in your lender’s office. Explain the situation. But keep in mind you are not the only one in trouble; the lender probably hears similar requests on a daily basis. (The lender) may ask you to try a short sale first, because legitimate lenders do not want to own property. If you give the deed back to the lender, the lender will have to pay the real estate tax and the insurance, and the lender clearly does not want to do that.
You may also want to work out a loan modification. But any activity that you take, short of keeping current with your mortgage, will impact your credit scores.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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