Get Out of Debt Guy - Steve Rhode

How Can We Get a Big Enough Mortgage to Pay Everything Off?

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Question:

Dear Steve,

We owe $495k on first mortgage, $168 on 2nd. Paying at over 6% on first now. Also unsecured debt of around $100k. And we have a Rex agreement. House worth over $2 million, so there’s equity. DTI was good enough to start process, but FICO was 663, so process has dragged 6 weeks and they’re asking for $30k in savings, which we don’t have.

Loan we’re applying for is jumbo, 780k to erase all debt and refi. It’s been torture cuz it’s so close. Working with Banc Home Loans in San Ramon.

Should we aim for a lower loan, leaving out the 2nd mortgage? We just need breathing room cuz I get paid sporadically as a freelancer.

Thank you!

John

Answer:

Dear John,

Ultimately this is really a math question. I would imagine your second mortgage probably has a higher interest rate.

Your credit score is already in the crapper and I’m sure that has an impact on your attempt to borrow at a better rate.

And while I’m not suggesting this as the primary solution, since you live in Texas and the odds are really good the chances are very good that if you filed a Chapter 7 bankruptcy, you’d be able to discharge your unsecured debt, keep the home, and rebuild better credit for the future.

Since your income is sporadic it may work to get you qualified under a Chapter 7 bankruptcy.

I would at least explore this option to see if it is possible and to learn more about what bankruptcy would mean for you.

Most bankruptcy attorneys offer a free consultation and you can find a local bankruptcy attorney who is licensed in your state and make an appointment to talk.

My gut is thinking with the current low credit score, and draining your savings to hopefully get the mortgage, you might be setting yourself up for failure.

Another option would be to only borrow $713,000 and use $50,000 to settle your debt. That might keep you out of having to reach as far into savings. Either settling your debt or filing bankruptcy will wind up on your credit report. Generally filing bankruptcy is a less expensive way out of debt and faster if it is a Chapter 7 bankruptcy.

As far as the REX Agreement goes, it does not seem to be triggered because you are not selling the home. I’m assuming you are talking about the REX Agreement where you borrowed a percentage of the homes value and promised to repay 50% or so of the equity at the time the house sells. Hopefully your agreement is not for a specified period of time instead.

As I remember, there is some equity limit up to which you can borrow with a REX Agreement in place. You might want to check your paperwork and look for the section on maximum authorized debt. A key point to look for as well is going to be what the original agreed upon value was.

Talk to the bankruptcy attorney and then come back and update me in the comments below.

And finally, this is not going to be a situation that is going to be best resolved by anyone online. To make sure you are not jeopardizing your equity agreement and you are accomplishing your financial goals using the least expensive option, I think this is going to require some consultations with licensed professionals in Texas.

If you have any concerns about the Rex Agreement, seek the advice of a licensed real estate attorney in Texas.


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