1. First off I want to say that I am not promoting going into foreclosure but let me tell you something about when it makes sense to do it. Foreclosure is now a word that every American now knows. Ten years ago you might hear that word occasionally or maybe when a business was going bankrupt, but not as much as you do now. The mortgage industry is having the worst time of its existence and their is not one person who is not affected by it one way or another. This is a story for the people who can pay their mortgage but need to move or downsize or something else but just cannot sell their house.
2. Many people around the country are losing their jobs right now because the economy is heading or already is in a recession. When people don’t have the money coming in to pay their bills the bills do not get paid. The first things that usually get passed up on are the credit cards and car loans. The last one that you want to pass up on is your mortgage payment. You need a place to live so you keep paying it as long as you can without being late.
3. Let’s say that you are one of the people who have a job right now and are not affected by what’s going on in the economy around you. You have enough income coming in your household to continue living your current lifestyle. You keep paying your bills but are at the point where maybe you live to far from work right now and with gas prices going up its just eating away at your wallet. Maybe your kids are moving out and its time to downsize. Time to sell the home.
4. You walk out your front door and you look to the right then the left and you count 14 for sale signs just on your street. This is pretty common in the Detroit area right now so don’t feel like I am exaggerating. It’s reality. Eight of those homes are going into foreclosure so you know already that the price of those homes is going to be way below what you perceive the value of your home to be. You also owe on your house $40k more than what all of the foreclosed homes are selling for.
5. Your options are to put it up for sale and hope somebody just really loves your house more than the other 8 homes that look identical to yours, same sq footage, bedrooms, tiling, everything, and wants to pay top dollar for it walks into your house and slaps down cash. This is more than likely not going to happen. Another option is to sell the house for what the foreclosed homes are selling for and bring $40k to the closing table out of your pocket to cover the difference. You don’t have $40k and if you did you wanted to use that for your down payment. What to do now?
6. You game the system. That’s right, game the system so it comes out in your favor. Keep making the payments on your home while you are looking for the new house that is closer to work or a smaller one. You should be able to find exactly what you want nowadays with so many homes up for sale. Take your time. You still have money coming in to pay your bills and home prices (including yours) are dropping every month. Make a low ball offer on every home that you think is going to be the one that you want. Just remember that the real estate market around the country is going to be heading back to what home prices were in the 2001 era. Do your home work and see what it sold for then. The home is still probably over prices and offer them near to what it sold for. Maybe they take it.
7. You find the home you want. This is when things get into action. You call up your local bank, credit union, or national lender to get approved on a mortgage. You talk mortgage rates with them and tell them that you are trying to buy a new home. The new home is probably going to have a much smaller mortgage than the home your currently living in. You tell the lender that you are keeping your current home as a second home or that your going to let your kids or family live in it while you move. You ask them if you can be approved on the new mortgage with your current income.
8. If they say yes then the game is on. What the mortgage lender just told you is that you are approved for a new mortgage to buy a new home and that you make enough money (in their eyes, based off a credit report) to handle two home loans, car payments, etc. If they say no, then most mortgage companies will ask you if you plan on renting it out? Say yes. What the mortgage lender will do now is see how much comparable homes are renting for in the area, get a dollar number and put that number in their approval process as income. They shouldn’t do this because you have no way of showing them that you are going to rent it at all. Remember, the mortgage lender is there to make loans and as long as their guidelines permit it then they will do it.
9. Let’s say though that you are approved just based on your income and no additional rental income is needed. At this point you have to ask yourself a real personal question. How bad do I want this home and am I willing to live with what is going to happen to my credit if I let the home go into foreclosure? If you say yes then this is what you will have to do. If you plan on getting any new cars within the next 2-3 years go out and get them now if you plan on leasing or financing a new car purchase. If you do not have a credit card go out and apply for 2 or 3 of them. If you want to buy a time share in Cancun get it now. If there is anything that you think you are going to want to finance over the next 2-3 years get it before you let your home go into foreclosure. The reason is that when you let your home go into foreclosure your credit history is going to get jacked up. Its going to show that you have paid all of your bills on time, credit cards, car loans, time shares, etc. All that is besides a home foreclosure. Since you have taken the cars, credit cards, time shares out before the foreclosure those lending institutions are not going to know the difference. They don’t care and as long as you are paying them its all the same. You can still charge things to your credit cards and use them as normal, just pay them off in full every month. You are going to need those things opened to help rebuild your credit over the next two years. Most mortgage companies are not even going to look at you to but a new home or refinance one if it has been two years since a foreclosure. After that then you can do it. In those two years you have been paying every thing on time so your credit scores should be on their way down. Be prepared to see you credit score drop 150 points or more on your credit report. Who cares. As long as you pay all your bills and use cash for alll of your purchases then you do not need any more credit. All a credit report is is a piece of paper. Do not let it tell you how to live your life. It does not know what;s going on in the outside world. Look down at your desk, find a piece of paper, write credit report on it and rip it in two. This piece of paper will mean nothing.
10. So you buy the new house and get moved in. As an example let’s say your old house had a mortgage on it for $150k and the exact same homes that foreclosed sold for $110k. Instead of paying the bank $40k, you keep it in your pocket and put it into a savings account or mutual fund earning you interest. You buy your smaller home for $100k and you probably got a home that is not a fixer upper. You are in the new home, your loan is closed and the new mortgage shows up on your credit report the next month along with your old one and the other cars you just leased or purchased. You lock up your old house because you still technically own, collect the mail and wait for a notice of foreclosure. The notice comes, you call the bank and drive up there and drop off the keys. They of course will not be happy. Now look how much grief you saved yourself. You have $40k still in the bank (if you even had it). You are now in the house you need. Your mortgage payment probably dropped by $100 month. For fun lets calculate it. $150k at 7% on a 30 year fixed rate mortgage is $998 a month. $100k at 7% for 30 years is $665 which is $998 – $665 = $333 in savings a month. I was way off in my guess. That’s the car payment on the car you just leased before foreclosing. Most importantly, you are no longer stuck with a house you are never going to be able to sell without having to bring money to closing. The reality of the real estate market is that home prices are never going to be as high as they were from 2002-2007. Just like I stated when I started writing, I don’t promote you foreclosing on your home. I’m just saying that if you have everything else in order and it makes sense don’t feel bad about doing it. All that is going to get messed up in your name is your credit report. Since you have everything you were going to finance for the next couple of years and you still make good money then your all set. If you like the area you live in then you might be biting the bullet now but that’s the price you pay if you have to stay.