Live Debt Free

Pay off debt. Save. Give. Live your mission.

We Did A Short Sale Of Our Home

by //

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.

*******

Understanding Debt [Part 2]

by //

In part 1 of Understanding Debt, we discussed credit card debt, student loan debt, payday loans, financing a car, and personal loans.  This time, let’s take a look at four more types of debt:

1. Medical debt

Medical debt isn’t sought out. Instead it typically results from an unexpected medical emergency.  The best way to avoid medical debt is with sound preparation.  Having a health insurance plan that fits your situation is a must.  People often tell me they can’t afford health insurance, and my response is always “you can’t afford not to have it.”  You can make a bad financial situation much worse by not having health insurance.  It is easy to accumulate a $100,000+ bill when involved in a medical emergency. Insurance is there to insulate you from those huge bills.  You also need to have an emergency fund to cover deductibles or copays as well.  Also, having a baby is expensive (typically around $15,000).  I know many people who are “paying off” their child, which seems ridiculous, but is actually quite common.  If you know the baby is coming you need to do everything you can to save money.  That may mean taking a second job or temporarily stopping retirment savings.  Having a baby is not an emergency, so you should plan for the medical costs.

2. Home equity loans and HELOC

This is one I get asked about a lot.  A home equity loan is often used as a consolidation loan.  There is nothing naturally evil about a consolidation loan.  There can be problems with them however.  The first is that you are leveraging your most important asset, your home.  If something happens where you cannot pay it back, you could lose your home, and that’s a large risk to take.  I have worked with many clients who have consolidated debt in the past.  Two years later, they are contacting me with debt problems again.  According to Cambridge Credit Corp, 70% of Americans who take out a home equity loan or other type of loan to pay off credit cards, end up with the same amount of debt (or more) within two years!  That’s a pretty sobering statistic.  While debt consolidation can work, it’s certainly not an automatic problem solver; if you do it you need to do it right.  I have often seen that taking out a consolidation loan gives people the feeling that they fixed something without addressing the root of the problem which is usually overspending and not living on a budget.

A home equity line of credit (or HELOC) also falls under this category.  The only reason to have a line of credit is to cover overspending.  A better plan is to not overspend (now there’s a novel idea)!

3. Unsecured bank loans

The major problem I see with unsecured loans is that they usually comes from overspending as well.  “I need money fast and don’t know where else to get it.”  Usually, an emergency fund or saving up to buy a large ticket item will make an unsecured loan unnecessary, and is a much safer way to ensure you are buying stuff you can actually afford.  Plus, it takes all the risk out of having a loan.

4. Mortgage

Finally, a kind of debt that I don’t have a major problem with.  Although I would ideally like to see someone buy a house with cash, it’s not typically feasible because of the large amount of money involved.  That said, it is extremely important to buy a house you can actually afford.  My wife Mandy and I found this out the hard way as we sold our first house in order to move into something more in tune with our budget.  I recommend buying a house where your payments will be 25% or less of your take home pay – based on a 15 year (or less) mortgage. Why?  If you take out a loan for $150,000 with a 3% interest rate, you will pay $77,666.90 in interest over 30 years.  If you take out a 15 year loan for the same amount, you will only pay $36,459.76.  That is a huge difference, and when more than 25% of your pay goes toward your mortgage, it’s near impossible to accomplish other financial goals. Another must is to put 20% down at closing.  Doing so will help you avoid private mortgage insurance  (PMI), which is basically just money down the drain.  One final rule: base all of these numbers on one income, even if you’re both working.  You never know what will happen when kids enter the picture.  Even if you both plan on continuing to work, living on one income is always a good idea!  In fact, Mandy and I had to sell our first house because we based what we could afford on both our salaries.  Once our first baby arrived and we decided Mandy would stay home, which through all our budgeting numbers out the window!  If start living on one income but both continue to work, great, now you’ll have more money to give, save, live your mission!

These are obviously just my thoughts on debt.  I will say however that they don’t just come out of thin air.  They’re based on facts, personal experience, and the experience of working with clients who have had these types of debt totally ruin their lives – and to me, the debt just isn’t worth the cost!

****

What are your thoughts?

Walking Away From Your Mortgage

by //

Is it okay to walk away from a mortgage?

Whether or not it’s “okay” to walk away from your mortgage is a question only you can answer – and every situation is unique so don’t expect another’s answer to be your answer.

To help you reach a decision let’s consider the following:

  • How far underwater are you?
  • Do you have recent financial hardship?
  • Have you considered and tried alternatives to walking away… like refinancing your mortgage or a short sale of your property?
  • If you wait it out, will you ever reclaim enough value to cover the mortgage?
  • Do you have personal or religious beliefs that keep you from walking away?

Let’s take a closer look…

Are you in financial hardship?

If you or your spouse have recently lost a job, you may be able to claim hardship.  Most lenders have loss mitigation departments dedicated to helping people in your situation.  Call them and try to work out a solution.

If you don’t have financial hardship then simply walking away from your property probably isn’t an option.

Have you tried refinancing your mortgage?

If you are in financial hardship, you need to strongly consider refinancing your mortgage.  Lenders are willing to work with borrows in ways they never would have a few years back.  Why?  Because they don’t want you to walk away from your mortgage… you’re their livelihood.

If your current lender won’t work with you… one company offering free mortgage quotes right now is CapWest Mortgage.  Since the quote is free it’s a good way to find out if they can work with you to find a solution.  You never know till you try.

Have you tried a short sale?

If you cannot afford your home, and have discerned that refinancing will not work for your situation, you can consider a short sale.

Pertaining to real estate, a short sale is nothing more than a sale of your property for less than the amount of your loan(s).

As mentioned above, contact your lender and ask to speak with the loss mitigation department.  They will evaluate the potential of a short sale transaction on your property based on their own pre-determined criteria.  In light of the overwhelming amount of loss they’ve suffered from mortgage failures in the last several years they’re often open to offers outside of their existing criteria as well.  Put another way, lenders are more willing than ever to accept short sales.

If you’re under-water and unable to cover your mortgage with a sale, a short sale delivers an opportunity to avoid foreclosure.

Will your property reclaim value?

Since we cannot foretell the future let’s contemplate other relevant points.

Find extra work – If you love your home and could make your payments by finding extra work… go find more work.  Our generation is certainly not the first to come upon hard times.  You could deliver pizzas, wait tables, write online, or even start your own business.  If you want to stay in your home then be sure you work hard and give it your best shot before walking away.

Rent out your home – Could you rent out your property and find less expensive housing for yourself?  There are currently many people looking to rent homes rather than buy.  Try placing an ad on Craigslist to find renters.  If you can’t charge enough to cover the entire cost of mortgage, insurance, and taxes… figure out how much less you could charge while still helping to make your payment and reach your goal.

Rent out a room –  Rather than renting out your entire home, perhaps you have 1 or more rooms you could rent out.  This would allow you to stay in your home while helping you meet the payments.  Another benefit to this is the fact that you still reside in the home and can keep a better eye on your tenant.

Does walking away conflict with your beliefs?

A final point to consider is whether or not walking away goes against your personal beliefs.  If it does, then be sure to give the alternatives your best effort.  If you do everything in your power to make your payments but are still unable to do so, at least you didn’t compromise your morals.  Only you know if you’ve done your best.

I was inspired to write this article after seeing this infographic on creditloan.com detailing the statistics of those walking way from mortgages.