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Some household finance issues
Old 09-16-2010, 03:13 PM   #1
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Some household finance issues

I have a complex question with lots of issues, if you see a way to simplify this or fix an issue, please chime in.

In 2005 we bought a new construction house for a decent amount of money. We foolishly put 5% down and have an 80% first and 15% second mortgage. $2200/mo on first and $400/mo on second. Both are fixed rate mortgages now.

We are under water on the mortgage- by anywhere from 70k (appraised) to 90k (what we would likely sell for).

My wife wants to get rid of the house (more on reasons below). Short sale would damage credit, I am OK with walking away, but need to time that with a job change (below).

I am in middle of changing jobs (and careers) and part of this is going from a salary at mega mega mega corp (we are really big) to a nearly 100% commission based job in financial services industry.

My income short term will take a hit- about 50% drop if I do good, and if I am successful, within 3-5 years I should make much more than I do now, and also be much happier with type of work I am doing (this is why I am changing jobs).


My thought process is we only lose money if we sell, however to recover 70k of equity might take 20 years. If my mortgage payment was less I could save 70k in 5-10 years, so it makes sense to get rid out house.

A credit check will be part of new job for me, and my score is currently 767 and wife's score is about 720. My research shows those scores go down to about 600 (120 point drop) on a short sale.

My thought process is switch jobs, keep credit intact. There is a possibility our income does not drop much, and we can keep making house payments and similar (401k savings...). Meaning don't do any "negative net worth" moves like a short sale until its well known we cannot make house payments with my job change and the economy.

Right now we stopped the IRA contributions so we have more cash on hand to buffer the career change, and our 401ks have a little wiggle room (we contribute higher than the match), but even those will get reduced once I change jobs.

We have about 200k invested now, age 37/36.

My focus is primarily on cutting expenses and being successful with new sales job, where as wife would like to short sell current house, get a place we can afford on her salary alone, while over next 3-5 years my commissions increase and income becomes higher than it is now.


Anyone have opinions on issues like this:

1) should we keep house until its well known we cannot make payments? (right now we have no issue with any household expenses (gross income of 120k combined)

2) when doing career changes (because I did not like job I have now) what steps did anyone here take to minimize financial impact to family? (cut expenses, increase taxable savings...)

3) When hindsight shows a bad financial decision was made (bought house at wrong time with little money down), how would a decision like that get corrected?
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Old 09-16-2010, 03:21 PM   #2
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One quick thought--check on your new position and what SEC regs cover it--if, say, my boss defaulted on a mortgage personally, we would be required by the SEC to notify every one of our clients to inform them of his financially precarious position. Likewise on personal bankruptcy. Short sale wouldn't have the same negative implications, I suspect. I don't know what your new position will be, but that might have some bearing on the decision.

I like your thought process of switch and keep your house,credit, etc.
To your questions: I'd say yes to #1, on #2 bulk up liquid savings while trimming discretionary expenses, and #3--well, the simple answer is time. Paying down that mortgage will eventually bring you back to the good side.

Good luck in your new career!
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Old 09-16-2010, 03:35 PM   #3
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We currently are selling a house where we will net less money than we owe on it. Current listing price is a tiny bit more than we paid for it but a final selling price will likely be less.

When you talk about a short sale people usually mean a sale where they sell for less than what they owe and expect the lender to eat the difference.

Bear in mind there are a lot of different ways you can handle selling for less than what is owed:

1. Pay the shortfall. That is our plan. We are prepared to simply bring our own check to closing. Therefore there is no negative impact to us from selling for less.

2. Sell for less, but borrow the money to cover the shortfall. This usually works better for small shortfalls but, again, if you simply get a loan to cover the shortfall then you don't have default on your loan or have a negative credit impact for having a short sale.

3. Much like 2, but ask your mortgage lender to loan you the money to cover the shortfall. I suspect that this might still affect you negatively from a credit standpoint but I don't know.

4. Lender agrees to the short sale and let's you close but reserves the right to collect a deficiency against you. You really need to know if your state has deficiency judgments on home mortgages (most do).

5. Same as 4 except the lender agrees not to collect a deficiency.

These last 2 will hurt your credit quite severely. Other options are a deed in lieu of foreclosure and foreclosure. These will also severely hurt your credit.

Other options might be to stay in the house and try to cut expenses so you don't default (and might make changing careers right now not a good idea). I guess a possibility would be rent it out but that seems unlikely to make much sense.
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Old 09-16-2010, 03:39 PM   #4
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1. Yes
2. Cut expenses
3. Was this really that bad of a financial decision--do you not like the house any more (it must be a really nice house)? Would you really not want it if you weren't underwater?

How are you going to buy another house--will you be able to get a mortgage with a short sale/foreclosure on your record?
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Old 09-16-2010, 03:47 PM   #5
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1. Yes
2. Cut expenses
3. Was this really that bad of a financial decision--do you not like the house any more (it must be a really nice house)? Would you really not want it if you weren't underwater?

How are you going to buy another house--will you be able to get a mortgage with a short sale/foreclosure on your record?
Plan is to rent until credit was fixed and we accumulated the 70-100k needed for a down payment.

It is a great house and great location, only issue is we did not put 20% down (if we put 20% down we would NOT be under right now, 70k is a 20% drop in price- we bought for 350k).
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Old 09-16-2010, 03:47 PM   #6
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Originally Posted by Bestwifeever View Post

How are you going to buy another house--will you be able to get a mortgage with a short sale/foreclosure on your record?
I remember seeing a show about how people were getting around this problem. They would claim the short/foreclosure was going to be rented out and then got the new house, knowing their credit rating would be slammed after the fact.
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Old 09-16-2010, 03:48 PM   #7
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Originally Posted by Katsmeow View Post
We currently are selling a house where we will net less money than we owe on it. Current listing price is a tiny bit more than we paid for it but a final selling price will likely be less.

When you talk about a short sale people usually mean a sale where they sell for less than what they owe and expect the lender to eat the difference.

Bear in mind there are a lot of different ways you can handle selling for less than what is owed:

1. Pay the shortfall. That is our plan. We are prepared to simply bring our own check to closing. Therefore there is no negative impact to us from selling for less.

2. Sell for less, but borrow the money to cover the shortfall. This usually works better for small shortfalls but, again, if you simply get a loan to cover the shortfall then you don't have default on your loan or have a negative credit impact for having a short sale.

3. Much like 2, but ask your mortgage lender to loan you the money to cover the shortfall. I suspect that this might still affect you negatively from a credit standpoint but I don't know.

4. Lender agrees to the short sale and let's you close but reserves the right to collect a deficiency against you. You really need to know if your state has deficiency judgments on home mortgages (most do).

5. Same as 4 except the lender agrees not to collect a deficiency.

These last 2 will hurt your credit quite severely. Other options are a deed in lieu of foreclosure and foreclosure. These will also severely hurt your credit.

Other options might be to stay in the house and try to cut expenses so you don't default (and might make changing careers right now not a good idea). I guess a possibility would be rent it out but that seems unlikely to make much sense.
Knowing we could borrow money to keep the short sale off records and not have it effect credit is helpful- I have credit cards with 50k limits I could use if I had to- great info.
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Old 09-16-2010, 03:59 PM   #8
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we know of a friend of a friend who was underwater in their house in AZ. they arranged a short sale and then arranged to rent from the new owner. they did all this for nothing more than "not wanting to be under a house for 15 years." reflects horribly on character if you ask me.

i think you're over reacting. i would stay put until I knew for sure i had to sell. who knows, maybe you'll even get a cushy corporate relocation packages which helps to minimize your loss? the future is so hard to predict...
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Old 09-16-2010, 04:09 PM   #9
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Quote:
Originally Posted by jIMOh View Post
1) should we keep house until its well known we cannot make payments? (right now we have no issue with any household expenses (gross income of 120k combined)

2) when doing career changes (because I did not like job I have now) what steps did anyone here take to minimize financial impact to family? (cut expenses, increase taxable savings...)

3) When hindsight shows a bad financial decision was made (bought house at wrong time with little money down), how would a decision like that get corrected?
I would sell the house at a loss and take the loss rather than do a short sale and hammer my credit score or wait until I couldn't afford the mortgage payments. At your ages you have plenty of recovery time to save for ER.

I've done 2 career changes and each one took a lot of discussion with DW before proceeding. For each we had a back-up plan which involved having our expenses low enough to be able to live on DW's income. I've never been brave enough to jump without a safety net and turned down 2 potential lucrative opportunities when the kids were very small and DW was not working.

My brother had the same mis-fortune as yourself when he bought a house and it immediately lost value so that he was under water. However, his wife was not working at the time so she got a job and together they paid extra every month, cutting expenses as well, and after 7 years got on the right side of the equation. (ie they didn't wait for the house to appreciate).
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Old 09-16-2010, 04:16 PM   #10
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Aren't 2nd mortgages and (some) 1st mortgages recourse loans. meaning that they can come after you, for decades if needed to recover their losses ?

I have heard of cases like this where the banks and their collection agencies chase deadbeat borrowers. These can span a decade or more and run across state lines.
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Old 09-16-2010, 04:35 PM   #11
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I think you should stay where you are. get a part time job if you have too. You have assets you can use to bridge the gap, if you tighten your budget I think you'll be fine. What better sales motivation will you need? Talk to your lenders now, tell them your income is going to take a hit etc. It can't hurt. You're talking a period less than 5 years for your income to recover...
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Old 09-16-2010, 05:58 PM   #12
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My SO's son just did a short sale and he said if he had to do it again he would not do it . The bank did not forgive the second mortgage . His credit which was excellent is now trashed . He can not get a mortgage for at least three years and has had problems renting . He finally moved his family into a tiny duplex owned by their relatives in an iffy neighborhood . So basically it is five people in a tiny 1100 sq. foot apartment . Lots of tension in their house right now and the reason they did it was because they bought at the peak and wanted to ditch this house without using their savings and buy a less expensive similar house .So I'm voting with the do not do it crowd .
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Old 09-16-2010, 06:15 PM   #13
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jIMOH, I don't have any insights or suggestions but I just wanted to say how sorry I am that you are going through this. It sounds like such a nightmare.

They say that what doesn't kill you, makes you stronger, and that adversity builds character. If that is true then when (not if) you have come through this successfully you will look back on it from a position of great strength and character.
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Old 09-16-2010, 07:39 PM   #14
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Talk to your lenders now, tell them your income is going to take a hit etc. It can't hurt. You're talking a period less than 5 years for your income to recover...

Well, it can hurt. I've seen some reports of people who asked for a loan modification, ended up not taking it and continued paying as agreed but the fact they had requested the modification was reported to the credit bureau and hurt their credit.

The best options here are most likely to keep the house and wait it out (if the mortgage can be afforded) or sell it at a loss and pay the shortfall at closing. If the OP doesn't have the cash available to do this, get a loan to do it. Anything that increases debt will hurt credit score some but that is minor compared to what a short sale would do.
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Old 09-16-2010, 07:46 PM   #15
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A lot of good advice here, so I'll be redundant....

I really think for a young couple in their 30s taking a Short Sale on a house & trashing their credit is a really bad decision, especially since it will affect your future endeavors. (not so much if you were in your 60s & had lotsa savings)

Over the years I have known quite a few people (including myself) who have lost $$ on their home upon its sale, often for buying it when prices are high only to have a drop in value occur. This sort of thing has been happening long before the current Recession - although there is no doubt that this is one of the worst drops in RE I have seen. Most peeps just bring $$ into escrow to pay off the loan and just "suck it up" or keep the house as a home or rental if that works for them.

If I was in your shoes, I think I would keep the house (unless I really felt home prices were in for another big drop). Cut back on expenses & even ER savings until my career blossomed into a higher paying position. You might consider Xtra work or taking in a boarder (I actually started my Land-baroness career by renting out rooms in my house....which left me $$ to invest.) Selling houses is very expensive & taking a hit to your credit will have a negative impact on your future opportunities and outcomes.
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Old 09-17-2010, 05:33 AM   #16
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jIMOh - keep the house until it is clear you can't keep up the pmts. Then sell and take the loss (the 200k you have saved will cover it).

Why? Wo wants to buy financial products from someone who is irresponsible with their own finances? If your customers and/or your employer found out about it later, would you still have a job or customers? (Don't mean to offend, and I am assuming you would be selling some sort of investments/financial planning stuff, but if so, I certainly would not buy financial services from someone who didn't have his own financial house in order...Madoff is too recent in memory).

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Old 09-17-2010, 06:43 AM   #17
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I think there are a lot of factors to consider, but for somebody in there mid 30s, I wouldn't consider it if it was less than 30K, seriously consider it for $75K and would do it in heartbeat for over $200K.

This assume that this is really a strategic default you can make the payments/make up the shortfall with current funds. If you income drops to the point you can make the payments than there really isn't a choice.

My attitude is that is a business transaction some idiot banker let you borrow almost $350K to buy a house in Ohio with only 5% down. I think they deserve to lose their shirt. I say this as somebody who use to own bunch of banks (include Ohio based NCC) and still owns four bank stocks. Meanwhile Congress has encouraged people to walk away from debts, by no longer treating forgiven mortgage debt as taxable income and even extended this treatment until 2012.

Since many other are doing this you'll be in good company. I think that there has never been a better opportunity to walk away from a mortgage as we have right now. I suspect this is literally a once in lifetime chance.

Clearly there are cost, realistically you'll probably want to rent for three to seven years, but I am not sure that is a bad idea... The lower credit score, will result in higher interest rates for loans and auto insurance etc. But realistically I doubt the cumulative cost over the next say 7-10 years of the 100-150 point credit score drop would be close to $10K.

Now having said all this. AFAIK Ohio is a recourse loan state. Both the first and the 2nd mortgage holders can come after you for the money owe, plus I am imagine the cost of collecting it. However, my guess is that the same idiot bankers that loaned the money in the first place are to stupid/overwhelmed to go after strategic defaulters. (I am personally pissed that banks haven't been more aggressive at going after strategic defaulters and pushing them into bankruptcy.. )

Obviously, this is tremendously important decision and you absolutely should talk to real estate professional in the area, a lawyer, and certainly the bank. However, I would not let some misplaced sense of morality stand in the way in keeping a $20K financial mistake from turning into a $100K one.
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Old 09-17-2010, 09:05 AM   #18
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My attitude is that is a business transaction some idiot banker let you borrow almost $350K to buy a house in Ohio with only 5% down. I think they deserve to lose their shirt. I say this as somebody who use to own bunch of banks (include Ohio based NCC) and still owns four bank stocks. Meanwhile Congress has encouraged people to walk away from debts, by no longer treating forgiven mortgage debt as taxable income and even extended this treatment until 2012.

Since many other are doing this you'll be in good company. I think that there has never been a better opportunity to walk away from a mortgage as we have right now. I suspect this is literally a once in lifetime chance.
why potentially legal, and maybe wise from a "business" point of view. for me, my morals would dictate my decision more than those other two things. i borrowed money and agreed to repay. and while i have some sympathy for the OP's position, this is all being brought around by their own choice, not from unfortunate events like being laid off, having a major illness in the family etc. jmo.
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Old 09-17-2010, 09:31 AM   #19
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Remember... the hit to your credit score is a LONG time.... your new job might not pan out and you might need to go back to what you were doing at another company.... but if you are in the finance world, most will not hire you with bad credit...


I had a candidate that had tried to go out on his own... only to fail miserably... his credit was so shot, we could not hire him... he was toxic... you do not want to become toxic to potential employees...

So, a loss of $70K is an investment in future earning potential...
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Old 09-17-2010, 09:38 AM   #20
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why potentially legal, and maybe wise from a "business" point of view. for me, my morals would dictate my decision more than those other two things. i borrowed money and agreed to repay. and while i have some sympathy for the OP's position, this is all being brought around by their own choice, not from unfortunate events like being laid off, having a major illness in the family etc. jmo.

I kind of agree with this thinking... the OP went in an borrowed money stating that he makes a salary to pay it back... now, he has decided to take another job that only makes 50% as much as before. He wants relief because he is underwater and might not be able to make the monthly payments..

If he were not underwater, he would sell, pocket the gain and move on...
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