We Own Two Homes. Should We Try to Get a Loan Modification Instead of Refinancing? – Esty

“Dear Steve,

We own two homes. One is our permanent primary residence in TN. The other is our smaller previous residence in (here it comes…) Florida. Yes, Florida. Yay.

We bought in 2005 with a 5/1 ARM. We have until May 2010 to refinance that first 5 year ARM. We have had tenants there this year who will move out April 15th, so about 6 weeks. It is a small home (1150 sq. ft) and is worth about 107-134K. Borrowing 80% of the max appraise value of 134K would give us 107K. We would then be roughly 50K in the negative based on what we owe, about 153K. If we sell, we can expect to sign a deal around 115-120K based on latest closings in the neighborhood.

After realtors fees and closing sots that leaves us about 107K which again leaves us 50K in the hole. We would need an unsecured loan to cover that defecit. We live out of state and have never managed rental property before and know no one to do it for us at this time. The house note is not hard to pay but we don’t want either a balloon payment or an extra 50K debt.

Should we try to get a loan modification (instead of refi or selling)? How do we do that? Will that effect our credit score? How do we go about that? Is it a good idea for us?

Esty”

I asked my friend Susan Nilon to answer your question for you. I wanted to make sure you got an answer as quickly as possible as I’m a bit backed up at the moment. I’ll be watching the comments on this question and be around to help if you need me.

Sincerely,


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Hi Esty,

It sounds like you caught the Tennessee fever. I know a lot of Floridians who made the move north during the boom. It is a beautiful state!

Without knowing where in Florida your second home is located, I can only give you general information. Now is not a great time to sell a home in Florida. Where most homes are top-heavy with debt, the buyer has the market to control.

Let’s take a look at your mortgage. If you have a 5/1 ARM where after a 5 year period, the interest rate on the note is periodically adjusted based on an index, then there is a good chance right now that your interest rate could be lowered. If you have been paying an interest only payment, then there is a good chance that your interest rate will go up and your payments will be greater. The best thing I can tell you is to call your bank and find out what they can predict will happen when your ARM kicks in.

If your payments are scheduled to go up, then shop around with other lenders and see what they will offer you. Compare that with what your bank is offering. Put it all down on paper and see how it will make a difference with your monthly expenses. Consider also the amount that the banks will charge for that refinancing when you are looking at your monthly expenses. If the initial amount down is large, then it might not be worth going that route.

If you are in good standing with the bank, it is unlikely that they will allow you to do a loan modification. They usually won’t start talking about that until you have missed a few payments. And if you make the choice to miss a few payments to have that in your favor, then you must recognize that it will have a bad affect on your credit rating.

If selling your home is your choice, you could consider the option of a “short sale”. A short sale is the sale of real estate in which the proceeds of the sale are less than the balance owed on the property’s loan. You would ask your banker to agree to the lowered price of the sale and then forgive you on the remaining balance of your mortgage. But if this is the road that you choose, you need to understand how it will affect you beyond releasing you from the burden of debt.

First, if a short sale was agreed upon, you can expect that your banker would send you a 1099 at the end of the year. You accountant would have to consider the amount forgiven by the bank as income. So even though the burden of the house was no longer yours, there would still be a tax burden at the end of the year. Your accountant would be a good place to seek advice on how much this would affect the amount you owe or receive back from the IRS.

Second, your credit score will also be affected by the short sale. The amount forgiven will be reflected in your report and will make a difference on your future credit endeavors.

You do have other alternatives. If you decide that keeping the house is to your best interest, you can contact your local Florida Chamber of Commerce or the Better Business Bureau and ask them for the names of management companies in the area. The management company will help you find a tenant and manage your property. The charge for their services can range anywhere from a percentage of the amount of rent you will receive or an initial flat fee to find the tenant and then a monthly fee to management the property.

You also might want to ask your neighbors in Florida. They might be willing to help you find a tenant by placing an ad at a local community bulletin board or in the local newspaper. They might even be willing to look for someone for you in exchange for a fee.

Another thing to consider is offering the property as a “lease-to-own” opportunity. This will be appealing to those who are still living in Florida and do not have the good standing to apply for a conventional mortgage. With a lease-to-own program, you hold the mortgage of the property for a specified period of time. Your tenants live in the home and pay rent equal to the monthly mortgage payments. You then apply the payment to the mortgage. When the contract runs out (usually in 3 to 5 years), your tenants have the option to purchase the home and assume the mortgage. If the tenants purchase the home, then they get the benefits of the equity accrued in the house during the lease period; if they don’t purchase the house, the equity interest stays with you.

But most important is to do the research. Make the phone calls and collect the information. Then gather it in a notebook and chart the answers. Lay out everything in front of you to make the decision that is based on your best interest.

Let me know how it works out and if I can answer anything else for you.

Sincerely,

Susan

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