If you are considering purchasing another home then letting your present home go into foreclosure here are some tips that will save you trouble later down the line as well as help the transaction run smoothly.
1. You need an excellent lender who can structure your new home loan properly; after all there will be questions by the new lender.
2. You need an excellent real estate agent who knows how to structure this deal. Your real estate agent also needs to know how to find the right home. This may seem strange but not all homes will help the transaction and some actually will hurt your chances of qualifying.
3. There are no longer 100% loans so you will need a down payment. If you don’t have a down payment there are other alternatives but again your agent must be aware of these other options and how to implement them.
4. Once your real estate agent has located a likely home you’ll have to qualify for a new mortgage, so you can’t have any mortgage lates and you’ll have to have sufficient income to qualify for your existing mortgage and the new one. This is where a savvy lender is most important.
Many people are concerned with the ramifications of the foreclosure. Can the foreclosed lender sue for the difference? Can he attach my new home? And what about the IRS? These questions are whirling around in everyone’s head as they consider this method so let me help you with the answers.
1. Can the original lender sue me for the difference between what my home is worth and what I owe on a foreclosure in California?
California is a non deficiency state which means if you are foreclosed on and the mortgage company sells using a trustee sale which is the most common in California, then the lender has no recourse after the sale. But you must have the original loan you bought your home with. This is called the Purchase Money Loan. You can have a first and a second but the second should not be a HELOC as this is considered a line of credit and is viewed differently than a mortgage.
2. Will the IRS tax me on the difference between what the home sells for and what is owed?
If you have lived in your home for two years or more and considered it your primary residence then you have no capital gains responsibility for amounts $250,000 and under for single people and $500,000 and under for married couples. If you have not lived in you home for two years yet, there are other alternatives and a tax professional should be consulted before you begin this process.
3. Can the old lender take any action against my new home?
The answer to this is easy. NO the old lender has no ties to your new home and therefore there are no options for him to regain any money through your new home.
4. How will my credit be affected?
You will have a bunch of late payments and a foreclosure that will take your credit from the 700s to the 400s within a few months but consider this…you have a home and a new mortgage. If you have any credit cards or car payments these regular and on time payments will help you recover your credit score much more quickly. The new mortgage will have the biggest impact on your credit though. By making your new mortgage payments on time you are raising your credit scores monthly and if you don’t plan on using new credit for a few years then your credit score should have little to no affect of your life.
Now this all may sound too good to be true so my best advice for anyone thinking along these lines is research what you want to do. Talk to a tax professional regarding the aftermath of this scenario. There are many websites dealing with the foreclosure issue and the IRS issue, so take you time and thoroughly research your situation. If you decide this is the best course of action for your situation and you live in the inland empire call me and I’ll help you find the right lender and the right home.
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30 comments:
Don't forget you can lose your job if you have poor credit....
Hi Kathy,
I have a blog, LetItSink.blogspot.com, dedicated to educating people about walking away from their homes if they are upside down. One of my regular readers, Russ Dogg told me about you. Good work on this blog. If you'd like to do a guest post let me know.
Thanks,
Keith
LetItSink@gmail.com
Thanks for the compliment. I'm just trying to help people in a difficult situation.
Let me understand something here... As a Tarbell Agent you would want Mission Hills Mortgage (the in house lender for Tarbell) to arrange financing for a buyer you personally coached to defraud both their old and new lender?
How you got your RE License I will never know. Perhaps a few more courses in Real Estate Ethics might be in order.
Here ye to "anonymous." How agents like yourself can coach people into bigger mistakes and still sleep at night I will never know. You might want to do the right thing and let these people know they should be renters for a few years or maybe consider that these people who are so ready to defraud these banks and simply walk away should simply only rent.
This is just underhanded and dirty. How does this not break the obviously loose ethics rules of the NAR?
I'm eagerly awaiting your next post on how to rob old people and feel good about it.
I don't push people into doing anything, I simply outline the facts, the end result is their own decision. It's ashame that everyone always assumes the worst in a scenario like this, when often times the Buyer has been an unfortunate victim of circustance...job loss, loss of pay, job transfer and even health issues.
I relay information. I don't coach push or coerce people, I simply answer their questions to the best of my ability then encourage them to research for themselves all the alternatives available. Their decision is their own.
But Ms. Neilsen, you are giving both bad and unethical advice. It's on your blog. You typed it in. It would be best to admit how cringeworthy your post was, that you take full responsibility for "ahem" relaying information, and apologize for it.
Think of it this way: if you held a private 2nd TD on a property, as many REALTORS do in order to make a sale, how would your opinion be impacted if the owners decided to try out your "relayed information" advice?
So you're not the bank, and you're just "simply outlining the facts" but you're a member of the community and supposed to uphold standards.
Re-read your post and ask yourself if it was the best and highest use of your time.
The NAR has ethics rules? You sure wouldn't know it by this realtor's website.
My favorite part is how she suggests that having more debt will help your credit score recover, like your car loan or your credit card debt. That sounds like good advice for people who are defaulting on a whole house.
You guys are all DEADBEATS! Pay your dues, pay your obligations...instead of trying to find ways around the system.
Kathy,
I can see the IDEA behind what you're doing with this post. But would you feel comfortable with the Commissioner of DRE reading this post?
Let's look at it this way. I sell insurance. This is similar to me telling someone how to get covered for insurance, when they know they have an ailment. It's possible to do so. Is it right? No. It raises the prices for all others.
You know if enough real estate agents counsel their clients, and if even 5 per agent are actually successful, we'll have a huge program. Who will pay for it?
The rest of us. This may not be a violation of NAR Ethics (lately that's an oxymoron), but it comes damn close. I hope you have enough integrity to post this comment.
Per the previous poster if 5 people actually did this then there would be 5 homes sold that may not have otherwise sold and 5 new loans that the buyer can actually afford. It seemd this could actually create some business for the floundering banks. Especially if these people plan on letting their home go into foreclosure regardless if they buy another home.
You are defrauding all of us! The tax payers will end up footing the bill for your blatant lack of moral guidance. May you reap what you sow.
I think this is excellent information.
It is unfortunate that an information provider is being attacked by people not in difficult circumstances.
I found the post amazingly helpful and on point.
There are many circumstances that would require a person to walk away from an existing home they can no longer afford or cannot sell. They are still being responsible, paying all of their bills on time, but need to restructure and downsize their lives. With the real estate market the way it is, they may be up-side down and not able to sell the house for that reason or because no one is buying. Or perhaps the house is not able to be sold because the city is re-zoned land around them to be commercial, making it impossible that they will sell the house.
Circumstances beyond a responsible, bill-paying home owner's control therefore may require them to NEED to find a new home before foreclosure. They still need a place to live.
I think this realtor did lots of hard working, honest, ethical people a tremendous service.
thank you!
Just like five years ago when the market was booming...those who act first will be the ones who benefit the most from this tactic. Everyone who has an interest only loan on their home is actually further from owning their home now than they were when they bought it. That may seem counter-intuitive but it is true. I know there are people out there who have an 80/20 100% financed loan with a jumbo payment due at the 5 year point on the second.
Let's assume that the second is $100K and was used as the 20% to supplement a $500K loan. In a couple of years when that jumbo payment comes due and the house is worth about $350,000 what do you think will happen? The bank will certainly not refinance this loan as the LTV will be almost 150% and the owner will be foreclosed on. There is no way around it. Nothing short of an absolute miracle will stop this from coming.
So if faced with a situation such as this, who wouldn't try to make a move to take advantage of their credit (while it is still intact) and the low housing prices? It seems like a no-brainer to me. Anyone who thinks that this is something people in dire straits would not have thought of before reading this blog is a complete idiot. Everyone I know (most of whom make very good money and can afford their home) has at least considered this and they are not even in a desperate situation.
If you could move across the street into the same model home as you have right now and do so for 2/3 of what you owe on your own home, would you? If not, why? Because you are concerned about your neighbors? Ethics? Do you think that anyone at all involved with your particular housing situation cared or cares about how you are doing? Of course they don't and neither should you. I applaude the people who are sticking it out and I really do think that it is the right thing to do but I am not santimonious enough to criticize people who do try to escape via whatever means necessary.
I do think that it is funny to hear people advise against foreclosure because it will kill your credit. Isn't having good credit what go so many people into trouble in the first place? Seems to me that foreclosing is sort of a win-win for those folks as they have an easier month-to-month situation and can't get into credit trouble as easy as last time. Just my opinion.
As the saying goes, "if you can't beat 'em, join 'em"....and no matter what you think, you can't beat 'em
This whole thing makes me literally sick to my stomach. My skin is crawling right now at the mere thought that there are people so devoid of morals. This is called stealing and to try and couch it with, "some of these people are in unfortunate situations and need help" is laughable. If these people are truly in that much trouble the LAST thing they need is another house and a foreclosure.
Yay greed and deceit... let's keep it going America!
Buy & Bail should not be considered fraud since the 2nd Lender is approving the loan. This new trend actually might help the market to pick up by having buyers for existing homes and making the foreclosure homes affordable to millions of families that otherwise would be still priced out...and also keeping lenders in the business which are who created this entire situation. America is a Debt Nation ...a country that almost doesn't produce anything anymore...even the most common things these days are made in China. The US created this mess by sending all the jobs to China and India where they pay $1 a day workers that would cost here $20 an hour plus benefits! Great deal for CEOs but not for the average american that could support a family with a manufacturing job. If America doesn't change it's course and attitude...I guess the 2012 profecy is not that far from happening pluse the bible passages from Revelations that talks about the Great Fallen Nation where merchants cry after all it's value is gone! The average american doesn't even know where is Brazil and would believe it's in Europe if was told so. Brazil a 3rd world country is 30 years ahead of the US in Alternative Fuels where you can choose among gas, ethanol and natural gas in every fuel station...and Brazil and many other countries are self depended in Oil and the most important thing....FOOD which they can produce for the entire planet!
Here we are making a communist country like China a rich nation by buying everthing from them...and the worst is to buy oil from nations that are buying weapons to attack the US with oil money! This is the END if the US doesn't change the way we do things!
You are aiding and abetting FRAUD!
OMG, greed created this mess, plain and simple, and these specuvestors must pay the price for gambling. Any fool could see that double digit appreciation wasn't going to last forever. My family got in to trouble a few years back with layoffs, we tried to stick it out but we struggled, we knew the bubble would burst soon so we sold and you would not believe all the people who called us fools for selling. Now it seems quite obvious who the fools are now...
Yes, the banks and brokers are to blame, too, and now look at our economy, look at our dollar, look at the stock market, look at your 401K, look at the price of oil...American Greed...we deserve this dysfunctional society we have created...now go get into your gas guzzling SUV and drive into your 4 car garage and monster McMansion and take ownership of your decisions. Grow up!
I think question #2 refers to the reverse. If you owe $300K but the house goes into foreclosure and sells for $150K are you taxed for the 'loan forgiveness'? I would guess that it falls under different IRS rules than if you actually pulled a profit, ie, bought for $300K and sold for $700k. Any accountants out there?
When my student loans were forgiven when I pursued teaching in an underserved area I paid tax on the forgiven amount. I was relieved of 20K in loans. It was like being handed a check for 20K and I was therefore taxed on that amount. The same should apply to the jingle mail folks.
For all of you would-be economists out there - the value of a home is irrelevant unless you are selling it. If you owe $400K on a place that you believe is work around $250 because your neighbors are being foreclosed on and the other houses are selling for that amount, what difference does it make?
If you committed to the loan and you can afford the payments, why is it OK to dump it and buy a less expensive place just because it exists?
Ms. Neilsen - your claim to simply be providing information is specious, and you should be embarrassed that you even tried to defend it.
If you were truly "just providing information", you would provided as much due-diligence to the other options these people have instead of hawking the Buy and Bail route. I did not see anything else on your website that outlines options such as short sales or workouts thorugh any agency - government, corporate or otherwise.
You aren't fooling anyone - you are looking to make an opportunistic dime off of the backs of people who are either responsibly paying their bills, and will thus be forced to pay for this mess that the housing market is in, or those who, when faced with untenable situations did what anyone in their position should do - rented.
Yes, some people are in this due to unforeseen circumstances. Layoffs, illness, injury and divorce come to mind, however that does not give anyone the right to defraud these companies.
The loans on the new homes were made under false pretenses - they were provided because the new lender believed the buyer would maintain both homes.
What kind of a loan do you think these people would get if they were honest in their loan apps and listed that they plan to walk away from the old house?
If a person has to hide the reason they are taking an action, they should not take that action.
Well I just wanted to say that I am in the position that my wife lost her job and we can not afford to make our payments. We started this option ARM almost 2 years ago when my wife lost her job and has been unable to get steady work. The plan was to refi to a 30 year fixed rate loan when we got back on our feet, but the market declined into the cellar and now I am stuck. We have depleted all of our savings and most of my 401K trying to keep up with the payments because it was the so-called ethical thing to do. All of our hopes and dreams destroyed and all we wanted to do was work and contribute to society. Well guess what, now I need a place to live and must bail on my home. So I have a choice. I can either buy another home and let my current home go and have some sort of future, or go and rent and contimue to throw all my money into a black hole and end up with nothing for our family. Well for all you self rightous folks out there, I am going to do what is best for my family and so I don't end up on welfare when I can no longer work. Do you think the bank wants to help. NO. They just want there money. They had no problem taking the money when things were going well. Now when there investment went bad, they want me to pay for it. That's a load of crap. When I invest in stocks via my 401K and take a loss, no one else pays for it, I do. Same goes for the banks that made these bad loans. I wish I could stay in my home, but I will soon be forced to move and those same banks will have no remorse when they kick me to the curb. So no, I don't care if some of you think I should suffer with the bad debt. I am taking my shot at getting out of this debt. I will be making a payments once again to a bank who could care less about me. The only way out of this credit mess is to have those of us who have good credit get another home and continue to pay into this economy as soon as possible, before the whole thing collapses. I believe that IS the ethical thing to do. I wish things would have worked out different, but I cannot control the economy. Only those that control the money in the world can do that and THEY didn't, so blame them.
I am in similar situation with sick&tired. My husband lost his job and my loan is more than twice the price of the homes in my neighborhood now. I do not want to rent when there are houses similar to mine selling at less than half my present loan. I have tried to call the bank to explain my situation... they listened but did not do anything. So what do you righteous people want me to do now? I appreciate the information shared in this blog. It's very helpful. Thank you!
It's not "stealing".
The borrower walks away with nothing to show for all the money they paid. The banks gets the house. Both parties made a bad investment choice together, the banks are getting a bail out, whats wrong with the borrower trying to stay afloat?
My husband and I bought a home two years ago. We did 100% financing with an 80/20 loan. We wanted to save for a down payment but were afraid of being priced out of the market, so we found a place within our means, a town home selling for 263,000 (the new and reduced price!). We thought we were getting such a great deal, we didn't want to tell our pre-existing neighbors because we didn't want them to feel bad. And now, two years later, our community has languished with foreclosures as the prices have plunged from 263k to 135k. That is a 50% loss in two years! Yes, I know that prices will eventually go up so we havn't really "lost" anything, right? Not when you consider inflation and the time value of money. I've figured it out, and by staying here we are actually LOSING about $20,000 a year. Well, my husband and I decided we should do the RIGHT and MORAL thing and pay our debt, even though we hear all this crap every day about bailouts for everyone except us, and as we watch people move in next door who are paying HALF of what we are paying. Sure we're getting screwed, but at least we have a clear conscience. Then I found out about the "Mortgage Debt Relief Act of 2007" that the wonderful George W Bush pushed through and that allows people who "walk away" to get a tax break. It used to be that you would have to pay ordinary tax on any amounts forgiven whether through a short sale or foreclosure, but thanks to George W Bush, this tax will be forgiven through the tax year of 2012. Bush said in an article that he believes this will help reduce foreclosures... What, by giving an incentive for walking away? Where is the incentive for doing the right thing and staying? Why should my husband and I stay and continue to pay twice what we could, when we could walk away from a depreciated asset, lose nothing, and get rewarded for it to boot? What a slap in the face!! Well, we are done getting screwed. Give me ONE GOOD REASON to stay. Screw this system. My husband and I are walking. We have reached our breaking point. When you add the insult to the injury, we become angry at a system that punishes moral/ethitical behavior and rewards greed. BTW, my husband has a credit score of 810 and has NEVER missed a bill or payed one thing late (he's 46). When a system pushes someone like him to do the WRONG thing, then there is something seriously wrong (and it's not with us!!!). We didn't make the rules, we just play by them. Oh, and incidentally, the taxes that we should be paying on the forgiven debt is about $40,000 (that we now don't have to pay--and if we did, we would probably stay). Oh, and one more final thing, we are buying a new place before we bail, we are exhausting our savings to afford the 25%down, but with our new low mortgage of $650 for a house BETTER than where we live, we'll be able to save plenty of cash in no time. In fact, we'll be able to save about $25k a year by doing this. It feels wrong, but the slap in the face feels worse.
A lot of self righteous folks on this board - I agree - the lenders have raised the balloon rates beyond rational thinking, and lenders aren't willing to negotiate any variable whatsoever - until your 3 months behind that is - I encourage folks to walk away from troubled loans - chances are your credit is toast already if you have been late - and five will get you ten that the lenders are just baiting folks into sending money under the promise of "working something out".
Kudos' to Jennifer Wilson - your right on all counts. I think someone in the government did their math and realized that the only way for all of this mortgage mess to play out, was/is for all of the folks who earn good wages, but are now stuck with mortgage that are not sustainable - an avenue to walk away from them. The mortgage relief act is encouraging us to walk away - why in the world would we try to keep up with a 820,000 mortgage that has jumped to 10% interest from what was 5.75%? For those of you that are quick to hit the reply button - mentioning that we took the mortgage etc etc etc - we should pay the mortgage etc etc etc - keep quiet as you consider the fact that when these mortgages were taken out, there wasn't an issue with getting jumbo loans - and, there was a presumption on both the banks and investors part that the values of homes would continue to rise. This is no different then anyone buying a car - they presume they can pay the balance, and then all of the sudden they lose their job. Lastly - mortgages designed to allow for exactly what is happening here - you pay you stay, you don't you won't. For the banks or others to cry foul at the prospect of homeowners letting of their homes, who are they kidding. Banks don't fuss when they change the rules of the game mid flight - like they have been doing for over a decade with credit card fees and rate - now all of the sudden - there is value in allowing your home to be foreclosed upon nd the flipping banks are saying - wait, wait, wait - not so fast - we know we wrote that into the agreement where we could take your house, but we didn't count on being in this pickle - with a million homes gone belly up - now we want to call it immoral for our customers to find a use for and to take advantage of the fine print.
The ability to walk away from a mortgage as well as not have to claim income is a once in a lifetime piece of art. The banks will work like dogs over the next decade trying to criminalize this ability.
We stopped our e-payments effective 12/31.
I went through hell to get the mortgage on my home. But only becaused I have neglected my credit when I was younger and never botheredd to clean it up. When I bought my home I paid off all my old debts FIRST! I bought a home that I could afford. I bought it right morally and ethically. It is now MY responsibility to pay for it. If for any reason I can not make my mortgage in the future, I will suffer the consequence thereof. It is and always will be MY responsibility. Fraud is fraud. This blog is not morally or ethically right. I do believe that people are rewarded for hard work, living up to their responsilbilities and living within their means. I also believe that you reap what you sow. Borrowers that foloow the leads in this blog will reap the damage later. Or worse, the American taxpayer will and thier children will. Bad and dishonest loans is what happened to the housing market crash. Nothing else. Kathy Nielson, you and your kind I would never do business with or be friends with. You have no character.
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