This is for people who can pay their mortgage but need to move, downsize, or something else but just cannot sell their house.
Foreclosure is a word that every American now knows. The mortgage industry had a horrible time dealing with foreclosures from the first refi boom and everyone was affected by it one way or another.
We know when people don’t have money to pay their bills the last one they want to pass up on is the mortgage payment. You need a place to live so you keep paying it as long as you can without being late.
What If You’re Not Affected?
You have a job which provides enough income to afford your lifestyle along with being able to pay your bills.
Lets make up some scenarios as to why you are thinking about selling your home. Like a shorter commute into work or your kids are moving out soon and you want to downsize.
You walk out your front door and notice there are 14 for sale signs on your street. Eight of those homes are going into foreclosure which will bring the value of your home down. You are now $40k underwater.
Your options are to put it up for sale and hope somebody loves your house more than the other 8 homes that look identical to yours or you rent it. Becoming a landlord does not interest you and you know nobody is going to pay $40k more for your house.
You could list your house for sale at the same prices as the foreclosed ones and bring $40k to the closing table of your own to satisfy the remaining balance of the mortgage. You have $40k but you’d rather use it for the down payment on a new house. What to do now?
You game the system in your favor
Keep making mortgage payments on your home while you look for the new house. When you find the home you want is when things get into action.
Call your local bank, credit union, or national lender to get approved on a mortgage. You tell the lender 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.
If they say yes, then game on. The mortgage lender just said 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 if you plan on renting it out? Say yes. What the mortgage lender will do is see how much comparable homes are renting for in the area. They include this made up number as potential income for you on your application.
I’ve always thought this to be insane but I did this a number of times when I worked as a mortgage banker. It’s crazy to think somebody made a guideline allowing this. Especially knowing the mortgage lender would not call you up two months after closing to see if you’ve been trying to find renters.
Let’s say you are approved 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?
Are you willing to live with what is going to happen to your credit if you let the home go into foreclosure? If yes, then this is what you will have to do soon after you close on your new home.
Plan on leasing or buying new cars in the next 2 to 3 years? Get it now.
Need a new credit card? Get it now.
Want to buy a time share in Cancun? Get it now.
Anything else you can think of financing in the next 2 to 3 years? Get it now.
Keep making payments on everything including your old mortgage. You need your great credit to get approved on everything you want to finance.
And its because when you let your old home go into foreclosure your credit report 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 foreclosing, those lending institutions are not going to know the difference. They don’t care as long as you are making your payments to them. Having those open and making payments will help rebuild your credit over the next two years.
Be prepared to see you credit score drop 150 points or more. But who cares. As long as you pay your bills and use cash for all 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.
Lets say you buy your new home and put the $40k you had saved as a down payment on your new house instead of bringing it to the closing table to pay the amount you were underwater.
You are in the new home, your loan is closed, and the new mortgage shows up on your credit report along with your old one.
What To Do Next?
Stop making payments on your old house and wait for the foreclosure notice to come in the mail. When the notice comes you call the bank (or drive up there), tell them you are foreclosing on the property, and would like to drop off the keys.
They of course will not be happy but look how much grief you saved yourself.
Just like I stated at the beginning. I don’t promote foreclosing on your home. I’m just saying that if you have everything else in order and you 100% know you cannot sell your house for what you owe and renting it is out of the question than this might be an option.
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 you’re all set.
You will want to think this through and make sure you think of every scenario where you may look into financing. Open all of those before you go through the foreclosure proceedings. Get the new credit card. Get a 3 year lease on a car. Buy the used car.
There are more things than those and you should be prepared to pay cash for things for at least three years following the foreclosure as that’s how long it will take to fix your credit report.
It should also be noted that mortgage companies work with investors and if the investor thinks you are up to something fishy a few months after closing than they can call your new loan due.
There are provisions in the closing documents that say a mortgage company can ask you pay the loan in full if they can prove you are doing something fishy. This is one of those scenarios.
I cannot recall a time when somebody did this to me when I worked as a mortgage banker but from time to time a story like this would pop up. Its sneaky and clever.
So be warned. It would suck to have to write a check to pay the entire loan off if you got caught.