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We Did A Short Sale Of Our Home

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Howdy from the North Carolina mountains y’all.

Picking up and moving everything

Betsy and I recently picked up and moved everything from Lansing, MI to Hendersonville, NC (just south of Asheville). We moved for a lot of reasons including but not limited to:

  • great location for the local food movement
  • living amongst the Appalachian Mountains
  • warmer weather.

We haven’t been very vocal about this on DFA because for the previous 6 months we had been in the middle of a short sale of our home in Michigan. While in the process I did not want to talk about it publicly but now that it has completed successfully I can share the details.

A short sale of our home

You may have an opinion on short sales, I had one opinion before the process and a different opinion after going through it.

First let’s define a short sale for what it is: basically you sell your home/property for an amount less than what is owed on the mortgage(s). It’s really as simple as that. Short sales do not lower the property value of your neighbors because, unlike a foreclosure, it sells at market value.

In a short sale the bank holding the mortgage is the seller and thusly pays all realtor fees (buyer and seller). In a normal sale we would be the seller and would be responsible for paying the realtor fees.

I won’t get into the numerical details of the sale but suffice to say we sold the home for $50,000 less than what we originally paid for it nearly 5 years earlier. While living in the home we also did quite a few improvements including:

  • 60 yards of topsoil and a lawn installed throughout the lot
  • landscaping throughout the lot
  • a 350 sq. ft. paver patio off the sliding glass door
  • painting several rooms
  • all warranty work done throughout home before expiration (nail pops, etc.).

Though we sold the home for $50k less than the purchase price, when considering the improvements $65k is a more accurate assessment of equity lost over the 5 years we lived there.

Financial hardship

Before we go any further I wanted to clarify that to be considered for a short sale you have to be able to prove “financial hardship” to your lender(s). Betsy and I both went through job changes and were making much less than when we purchased the house so showing hardship was as simple as handing over our financials to our lenders. After looking them over both banks approved the transaction.

In short, you can’t just do a short sale because you want to, you have to be unable to afford your mortgage going forward. Be honest with the banks and avoid trying to pull any wool over their eyes; honesty is always the best policy.

Who should pay for the loss?

This is where it gets sticky for some people, but not for me.

Minus what we owed on the mortgages, we lost around $25,000 in equity. As mentioned above, in a conventional sale we would pay realtor fees (an approximate $14,000) in addition to our equity loss, putting the total loss around $39,000. Because the bank paid the realtor fees we were able to close with simply our equity loss and thankfully didn’t have to bring any money to closing.

Should the bank have to eat the rest of the loss, or should we have eaten it? That is the question. I used to believe we should, because we signed on for the debt. However, the errant lending practices of the banks had a lot to do with the market bubble and crash. Had they kept lending practices conservative the bubble never would have formed or popped. That makes them half responsible for all losses. We lost in equity, and they lost on the investment.

It’s important to note… because of the interest we paid over the nearly 5 years while living in the home, our first mortgage company still came out ahead on their investment. It is the 2nd mortgage (and lien) holder who ate the loss. They understood the elevated risk going in and charged a higher interest rate accordingly.

At the end of the day we shared in the loss with the 2nd mortgage company, and I believe that is the proper outcome. We both played a part in the transaction so we are both partially responsible for the losses.

You may feel different, which is fine; that’s one of the great things about living in a free country.

What about our credit score?

As I see it, your credit score is the only negative part of a short sale, but it doesn’t have nearly the negative impact you might think.

Before the short sale my credit score was around 790, which is considered excellent. After the short sale it went down to around 705, which is still considered good.

Here’s the kicker: the credit score went down because of missed mortgage payments, not because of the short sale.

Note: most banks will not consider you eligible for a short sale unless your mortgage is at least 30 days past due.

We’re not overly concerned about our credit scores – which are both still quite good – because we don’t plan to borrow money again and they’re plenty high to keep all insurance premiums low.

What about taxes on the forgiven debt?

It is the Mortgage Forgiveness Debt Relief Act of 2007 that provides tax relief for forgiven debt on mortgages of principle residence from 2007 through 2012.

As long as the home you’re selling is your principle residence, it does not count as income for tax purposes.

Where are we now?

After selling we decided against taking on the burden of another mortgage and are renting in our new location of Hendersonville, NC. Yes it’s a great time to buy, but taking on another long-term debt isn’t something we’re ready to jump back into right away. The plan is to rent for the near future and adapt as time and circumstances allow.

We’re both self-employed now running Debt Free Adventure, diy Natural, and writing books.

The only debt we have left is our student loans which you can see and track in the right sidebar. We’re planning to accelerate payments and pay them off within the next 3-5 years.

We have 3 months expenses saved for personal emergencies and are bringing in enough to cover our personal budget, business budget, fund our debt snowball, and build a modest savings.

We’re much happier working in our passions full-time and do not regret the decisions we have made, rather we’re quite satisfied with them.

A few more thoughts

Before the short sale we were hesitant to get involved in the procedure. It was unknown to us and we had heard a lot of negativity in relation to the process. After going through it we are confident to encourage others to look into it. It’s not as bad as the banks would have you to believe, and unless abused we don’t think the normal short sale process is “wrong,” quite the contrary actually – if it fits your circumstances, like it did ours, don’t be afraid, it can be a huge blessing.

If you do pursue a short sale, we recommend finding a local realtor who specializes in short sales. We did this and it made all the difference. Our realtor handled everything for us and took over all communications with our banks – I wouldn’t have it any other way.

If you do not use a realtor be sure to use a local counseling agency who specializes in helping underwater homeowners through mortgage modification, short sales, and foreclosures.

Share your thoughts and experiences

If you have an experience or opinion to share that will help the DFA community in a positive way, please add a comment below.

God bless.

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How to Buy A House with a Mortgage

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Owning a home – a.k.a. “The American Dream” – is considered by many as the true sign of “making it”.  There is a right way and a wrong way to make this dream a reality.  The last couple of years have shown that if you do not go about it the right way, you could end up with a real mess on your hands.  Foreclosures and short sales are at an all time high, so I wanted to discuss a few  tips to help you avoid negative housing situations.

Save for a down payment

It is possible to get a mortgage loan with very little down.  This could be considered good in certain circumstances, but overall it’s a bad thing.  It makes buyers think they can afford more than they can.  I suggest instead, saving up at least 20% for a down payment. So, if you’re looking at homes in the $100,000 range save until you have at least $20,000.  That sounds like a lot of money, because it is!

There are two advantages to this strategy: (1) it will insure that you will get a house you can afford.  If it takes you a couple of years to save up $20,000, it will appear clearer to you that you probably shouldn’t push yourself further by purchasing a $150,000 house.  Saving will also prevent you from making an impulse buy.  Trust me, you will want to think through a decision much more critically when you are writing a $20,000 check versus just coming up with $500 to cover closing costs. (2) it will help you avoid PMI insurance.  Most banks require that you pay for this insurance if you don’t have at least 20% down.  It protects them, not you, if you default.  For you PMI is a waste of your hard earned money.  PMI rates vary, but common amounts are $65-$70 per month on a $150,000 mortgage.  That’s money you could be putting to better use right? Like paying down credit card debt or saving for something awesome.

Monthly mortgage payment amount

This is extremely important.  If you want to do anything to get ahead financially (insert your favorite use for money here), it will be almost impossible if you are house poor.  For example, if 50% of your take home pay goes toward your mortgage, you will be lucky to cover the rest of your essentials such as food and utilities.  The math just doesn’t work. Instead keep monthly mortgage costs down below 25% of your gross income (after taxes).

Matt’s note: I suggest you keep you mortgage costs down to 10% of your monthly income, especially if you’re looking to buy in this amazing buyers market.

Here’s another tip if you’re a two income family – base the 25% rule on just one of your incomes.  Are you really comfortable assuming you’ll both be making the same income for the next 15-30 years?  I know we’re not!  Many young couples I’ve counseled start with two incomes then want to go down to one when a baby comes along.  When Mandy and I bought our first house, we kept our payment under 25% of our take home pay but we based it on both incomes.  When our oldest daughter was born and Mandy wanted to quit her job to stay home, it caused a problem.  All of a sudden our payment was closer to 30-35% of our take home pay.  It wasn’t killing us, but we could no longer accomplish many of the goals set when we had two incomes.  We ended up having to sell our house and move into something more economical.  It would have saved a lot of hassle to buy our current home the first time. Even if both spouses continue to work, you can always use the extra money to give, save, or do whatever you wish.

Shorter mortgage terms

This tip is simple math.  What law says you must take out a 30 year mortgage?  Hint: there isn’t one. Why is thirty years the standard?  Banks set that as the standard so they could make more money (interest on your debt).

Let’s look at an example.  If you take out a 30-year, $100,000 mortgage at 5%, your monthly payment will be $537.  The total interest you pay over 30 years will be $93,259!  If, instead, you took out a 15 year mortage, your monthly payment would be $791, but you would only pay $42,347 in interest over the life of the loan.  I don’t know about you, but $51,000 in savings is a lot of money to me!

Buying a home is a decision to think through very carefully.  Mandy and I learned these tips the hard way and my hope is that you don’t have to.

Use these tips to make sure your American Dream is a dream come true… and not a 30-year nightmare!

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Disappearing Middle Class [An Analysis]

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Social structure in the United States is in the midst of vast changes. The lower, middle, and upper classes are shifting their lifestyles as the national wealth flows in new directions. Statistics abound suggesting the “middle class” is vanishing, never to return. The problem with statistics about the middle class is that the term itself is somewhat indefinable. In fact, according to FactCheck.org a majority of Americans identify themselves as “middle class” or “upper middle class” or “working class.”

The technical

For years, the most common way to define the middle class was to refer to a specific income bracket. Using data from the U.S. Census Bureau, it is possible to quantitatively measure increases and decreases in the numbers of people in that bracket. In 2008, this data split the earnings of all people in the United States into five quintiles. Many commentators and analysts identified the middle class as belonging in the third quintile. The lower limit of this quintile was $39,001 and the upper limit was $62,725. According to the Census data, the number of Americans within this income bracket is indeed declining.

Real median household income declined by 3.6 percent from 2007 to 2008, according to the Census Bureau. Changes in the composite structure of the middle class combined with other factors such as technological innovation and income growth have drastically shifted what it means to be a member of the middle class. Once, a family of four could afford a house, a car, education and entertainment on a single paycheck. Today, the same family of four needs two incomes and debt in order to stay on top of their finances.

To complicate matters further, data from the U.S. Treasury suggests that the middle class is declining, but the reason is the members of the middle class are experiencing upward mobility. An op-ed published in the Wall Street Journal reported on the results of a study that tracked tax filers aged 25 and up from 1995 to 2005. Controlling for inflation as measured by the Consumer Price Index, over 58 percent of the poorest income bracket in 1996 moved to a higher income bracket by 2005. Of those, over 26 percent made it into the middle class income bracket, and over five percent made it into the highest income bracket.

So what’s the truth?

So what is the real story about the declining middle class? The truth is undoubtedly somewhere in the middle. The obvious explanation is that the middle class is not a fixed group of people. Income brackets stay the same, but people change throughout their lives. The poor can become rich and the rich can become poor, often in a very short amount of time.

The economy is almost alive, adapting to internal and external changes organically. While the middle class is declining in absolute terms, overall more members are becoming richer than they are becoming poorer. The economic crisis of 2008 led to much ink being spilled about rising income inequality and the destruction of the middle class. Income mobility changes the entire picture about income inequality and changing class structure.

To be sure, not all of the developments have been positive. Local and regional real estate markets have become stratified with the wealthiest zip codes experiencing tremendous demand. To make matters more complicated, even the definition of middle class by income brackets is relative to where the hypothetical family of four is located. In Beverly Hills, even a six-figure salary may be considered middle class, thanks to the high prices for almost everything!

It’s all relative really

In the end, “middle class” is a term over which a lot of hullabaloo is raised but the truth is complex and hard to summarize in a few key talking points. Technology has increased productivity, and income growth has resulted in greater upward mobility. The middle class does appear to be declining, but all of the data seem to suggest that this is a good thing.