I have written hundreds of articles on real estate, been published in books on real estate, and spoken to hundreds of people about real estate as well as appeared on TV and radio talking about real estate—all because just about everyone has at least some level of interest in real estate, especially these days.
If you’re a homeowner, chances are, you’re following the real estate market whether or not you’re thinking of buying or selling. That’s because, for most Americans, owning a home has become much more than just owning a piece of the American Dream. Owning a home today is seen as a way to build a nice little (or big) nest egg for the future. It’s a way to create leverage to buy and do other things that you couldn’t otherwise afford. That makes it a fantastic opportunity. The problem is, as we’re seeing today, many people bought homes thinking that the value of their home could only go up—but that’s clearly not the case.
In that mode of thinking many homeowners pulled equity from their homes to finance their children’s education, remodel, go on a vacation, purchase an investment property, or—you name it! When the market cycled, as it does, and turned south rapidly, these homeowners found they are now upside down (owing more for their homes than they are worth) and leaving them in a very precarious position. Many are frantically voluntarily opting out—walking away from their mortgages and living with a foreclosure blemish on their credit report.
Some homeowners are now using a “buy-and-bail” process to get out from the mortgage that is upside down. However before they let the upside down property fall into foreclosure, using their good credit, they attempt to purchase a new property at a much lesser price. Once that is accomplished, they stop making payments on the upside down property and thus foreclosure ensues.
How do they do this? The homeowners show lenders that they intend to rent out their current home. When determining if buyers can afford two properties, underwriters will consider how both mortgages will be paid. Buyers produce a rental agreement showing that up to 75 percent of the mortgage payments on the original home will be covered by rental income. Doing this, buyers can now secure a second mortgage and purchase the home they plan to live in.
However, private lenders, and even government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac (the nation’s two largest buyers of conventional home mortgages), are catching on and tightening lending restrictions so that “buy-and-bail” transactions are stopped. Lenders are now requiring proof that buyers can truly afford to make full payments for both mortgages in the cases where the buyers are keeping their original homes.
Obviously, stressful price value drops in the real estate market are making people seek every available avenue to financial freedom. How you get there is up to you. I believe it’s a wise decision to honestly face what you can or cannot afford. But consider the moral and economic implications first. Some advertising from newly-emerged companies makes it seem as though, for a fee, walking away will be pain-free. It won’t be.
Foreclosure is an ugly mark that makes your future financial goals difficult to accomplish. For instance, if you foreclose on your home and attempt to rent an apartment afterwards, you will find the apartment agencies are stricter and may likely turn you down.
However, if getting out of your home is what you must do, then do it. But choose how you get out wisely. Don’t just walk away and let lenders foreclose on your home. Think it through calmly and rationally. As with all choices, what you do today will affect you in the future.
So, you wonder, ‘Well, what can I do?’ You can think outside of the box and aim to find the greatest solution without running from your problem because if you run it will follow you.
Here are some things to get the creative juices flowing. You can consult experts such as foreclosure counselors from agencies such as the US government-run Housing and Urban Development. http://www.hud.gov/foreclosure/
You can talk to Realtors about short sales (selling your property to a third-party for less than the loan). Many properties are being sold this way right now. The lender plays a critical role in a short sale as the lender must agree to the sale, since the lender is taking less money than is originally owed. However, lenders are being more flexible because they don’t want to end up owning the properties.
How can you cut your expenses? Can you sell your car? Can you rent out rooms? Can you rent your entire home and live with relatives or friends? How can you earn more money? Can you go to your employer for assistance? Believe it or not, some employers are helping their employees who are facing foreclosure by granting low-interest loans that are paid back through your earnings. The point is, now is the time to brainstorm.
Think before you leap into a financial commitment with the numerous foreclosure companies that are popping up and advertising on the Internet. While many of these companies may be legitimate, some are going to charge you high fees to “review” your case and allegedly provide “help”, but in reality desperate homeowners are losing even more money to fraudulent companies. Check with the Attorney General’s office to find out more about the company you plan to hire. When you visit the US Department of Justice Web site, you can do a search for foreclosure and learn more about the various foreclosure scams that are happening. http://www.usdoj.gov/ag/
Hopefully this column generates some interest and provokes questions. I want these columns to answer your questions and address your needs. In order to do that, I need to hear from you. I look forward to exploring the issues that matter most to you as we continue to watch the ever-changing real estate market.