Reader Question: Hi Monty, I have two homes and two mortgages. Home “A” is underwater, and I am unable to sell it for the remaining amount owing on its mortgage. Home “B” is fine, gaining in value and is my residence. Both “A” and “B” are within the same city. I fear home “A” will go into foreclosure, as my tenant’s lease will not renew. I have a concern for my primary home “B” and would like to know what consequences I may face should home “A” be lost. Please help me understand the pit I am in. Ed Smith
Monty’s Answer: Hello Ed, thanks for your question. It appears the combination of being “underwater” and the tenant leaving has triggered your concern. Read this article about the potential consequences of being underwater. The questioner’s circumstances were different, but all the basic programs that could apply to your situation were discussed here. While the big difference in the article is that your home “A” is an investment property, many of the links in the article will be useful. For example, by clicking on alternative 1., the HARP refinance link, you will learn that investment property is eligible for refinancing. With the limited information provided, here is a qualified action plan.
The Action Plan
1. I see no reason to be concerned about Home “B”, unless the loans are cross- collateralized. Home “B” is a positive asset in your holdings.
2. You need a local advisor, or advisors that can help verify your situation. There are new rules in play today in real estate. Avoid an advisor who has to learn with you. Identifying active experts are a key point in obtaining the best solution. Check this link out on debt counseling. This organization has a lot of information and appears to be an efficient way to get an objective opinion on your options. If calling, ask for a counselor with the NFCC housing counselor certification. They appear to be legitimate and, I have no connection to them. If speaking with them, I would appreciate your feedback, as it may be helpful to others. Determining where you fit on the list of options in the underwater home article is “job one.” When all the facts are uncovered the best option will become clear. Your confidence in the accuracy of the information will be crucial in making decisions.
3. Here are the main issues;
- Verify value. Get a second, even a third, expert opinion.
- Determining if the mortgage can be negotiated or re-financed.
- Verifying your financial situation plus tax and legal implications.
As an investment property, home “A” is treated differently than a personal residence by most lenders. How far is the home underwater? $10,000 may not be worth risking your credit standing to take any drastic step; $100,000 makes your decisions more difficult. The lender will be less tolerant if you have the capital to cover the loss, so your financial worth is a factor. Have your attorney check out the lenders right to take a deficiency judgment?
4. By now, you will know whether re-renting home “A” is an option. It is an underperforming asset when empty. Consider replacing the tenants. If handling the details is not appealing, there are property managers that handle single-family homes. A good property manager can advise if renting the property makes good sense financially. They would be retained in a fashion similar to the method in which one hires a real estate agent. Collecting rent while waiting for the real estate market to recover may be less painful than a foreclosure.
Do not throw in the towel because the home is underwater just yet, as there is more information to be discovered
I hope this information helps to understand the situation, Ed. Ask me other questions after reading this material.