If you financed or refinanced a home between 2000 and 2007 in Arizona, you are upside down on your mortgage or you've lost down payment cash, or both. By upside down, I mean you owe more debt on your home, than your home is currently worth. In fact if you own a home in Arizona, you have a greater than 30% chance of being upside down on your mortgage(s). These are the facts. What you choose to do about it is the topic of this blog post.
Option 1: Ride it out:
Many homeowners are remaining steadfast in their ways. They're staying put and riding out the storm. However, you're gonna need deep pockets to weather this storm. If this is your option, then you owe it to yourself and your family to take a look at the real numbers. Look at the amount of interest you pay on your current mortgage(s) every month. If this storm lasts the 6-12 years that are predicted, you should add up the total amount of interest you will pay on money borrowed against a home value that no longer exists. Then look at a recently sold comparable in your neighborhood and use a loan calculator to figure the interest on a loan for that value. Compare the two numbers of total interest paid over the course of the next, say 10 years. What's the difference between the two? $10,000? $50,000?
Option 2: Buy and Bail:
Some homeowners that can qualify are applying for a new loan for a new home while still maintaining ownership of the previous home. Once secure in this new home purchase, they then bail on the previous home either by way of a short sale or foreclosure. Some attempt to rent the previous home to cover the carrying costs, but ultimately discover the going rent in the neighborhood doesn't cut it, or that becoming an accidental landlord is not cutting it. So without the need of applying for a new mortgage any time soon, they bail and take the hit to their credit. The challenge with this option is qualifying for both mortgages. Lenders will consider about 75% of the going rent in the neighborhood as part of your income; whether you have found a new tenant or not.
Option 3: Rent, For Now:
This option is pretty self explanatory…after a foreclosure or short sale, homeowners do not qualify to buy a new home; so they rent a comparable home with the intent to buy 3-5 years from now. Be informed: a short sale looks equally bad to a lender as a foreclosure. It's true that they show up differently on a credit report, but lender's view them both as bad. You will not qualify for a new home loan for quite some time. Be realistic about this decision.
Which option is best for you?
Some say ethics get involved. Is it ethical to just walk from the debt you owe against your home?
Well ethics didn't have anything to do with the decision by the bank to loan or not to loan you the money when you purchased the home. The bank made a decision based purely on business, so one could propose that buying a home is a business decision. For many, it's the greatest financial investment they'll ever make. If you assume that the relationship is based on business, not ethics, then you need to have a good exit strategy. All business ventures write an exit strategy into the origination of the venture. In fact, the bank has an exit strategy: foreclosure.
You can create your own exit strategy: a short sale. The question of whether it's more ethical is subjective and complicated. What's more important, it the question of whether it's better for you, whether it's the best exit strategy for you.
A short sale is a private negotiation between you and your lender which results in a mutually agreed upon settlement. In a short sale, all terms of the settlement are negotiable. The opposite is true in a foreclosure.
In a foreclosure you are restricted to the law. The law decides what will happen to you. In Arizona, you may be granted protection under the Anti-Deficiency statutes in place, so long as your loan meets the requirements in place under that law. If your outstanding debt is purely purchase money, meaning you never refinanced the original purchase loan, then you most likely will be protected in Arizona against a deficiency judgment. Consult an attorney. Law is complicated.
But law doesn't apply in a short sale because, again, a short sale is a privately negotiated settlement. You drive the bus. You still own the house. You can save the bank some money. You might be surprised what the bank is willing to accept.
I have successfully closed dozens of short sales in the greater Scottsdale/Phoenix area. I'd be happy to answer any questions you might have. I would also appreciate your attendance at any one of our free seminars around the valley.
