I recently got married and upon the final details found out that my spouse's condo was behind on payments because she had accidentally let the insurance lapse and a pipe burst.
I was just beginning my real estate/rental journey, listening to pod casts regularly and reading forum posts. I have some money saved up to put a down payment on my next property, but now I have all sorts of questions about my family's current predicament.
1. Pay $12k for a loan modification in which my wife's lender will set the loan back to current.
2. Attempt a short sale (lots of questions coming below about this) in which I buy the property from my wife.
3. Let my wife's lender foreclose on the property.
We currently live at her property now, but have other options if we need a place to live. I currently rent out my house that I owned prior to our marriage.
So #1 is kind of a crappy option because it will take my savings for my next rental property, plus I will have additional costs to repair the water damage.
I'm interested in #2. If I can buy the property on short sale, then my wife is free and clear of the debt and from a credit standpoint it is better (even if barely) than having a foreclosure.
The stats are as such:
Loan owed - $150k
Property value - $133k
Property value with water damage - $121k
I would like to get a loan for $97k put down $24k (20%) and make a short sale offer.
1. Who offers these type of loans? I've called some traditional banks and it seems that nobody likes this plan. Plus most state they'd have to get an exception for the husband/wife thing. (Note - Title/Loan is in my wife's name only since she owned it before we got married)
2. What else do I need to be aware of other than this may take a long time to complete?
3. Does this option make sense, or should I just use my money on a totally new rental property and utilize our ability to live elsewhere in the short term?
Questions for 3rd scenario (foreclosure)
1. If my wife's credit goes in the tank for a foreclosure, does it affect mine now that we are married? Obviously I wish we could avoid this, but from a financial perspective, if I know I can use my great credit going forward and will be handling all financial items, do I care about using my savings to dig out of this hole, or just go forward with much easier loans, which I can get approved for with much less hassle.
Hi I wanted to comment on your scenarios bc there are many misconceptions about loan modifications. The purpose of a loan modification is to bring a loan contractually current and make the new payment in line w/ the new economic situation the owner is experiencing. If your lender is advising you have to bring the loan current in order to get a mod, that is false and your are probably dealing w/ the collections dept (they receive commission for the amount of money they bring in so they are incentivized to get as much as possible!). In addition, it is not possible for you, as your wife's husband, to buy the property as a short sale bc it is not a "arms length transaction" which is a requirement of most lenders/servicers in approving a ss (most have affidavits that will need to be signed attesting to this). If retention is what you want then a loan mod is your best bet (best chance at a decent new payment and least expensive) and your wife's income is the only one that is "required" to obtain it (assuming she can support one based on the DTI ratios they use). If her income alone is not sufficient you then have the luxury of contributing to the household, if you so choose. Be cautious of this though as the more gross income you have the higher the new payment may end up being bc that is what they base the new mtg payment on. Only contribute enough to make the mod happen. With a good modification it is typically not even required that a cash contribution be made in order to get back on track as the terms of the mod usually make that happen!
Short sale between you and her isn't an option. The lender won't approve it. A short sale might be an option, just not to you. Your wife would need to show hardship and lack of income and assets. Is that the case? Is that now the case for the two of you?
Sorry, but this story doesn't add up:
found out that my spouse's condo was behind on payments because she had accidentally let the insurance lapse and a pipe burst.
For one, insurance on a financed property doesn't accidentally lapse. On a free and clear property, you might be able to ignore enough letters that the coverage would end. But on a financed property the lender is the one paying the premiums from the escrows they collect each month. So, unless you explicitly cancel your coverage, or your insurance company cancels you and you ignore those letters, the coverage isn't going to "accidentally" end. Further, if this does happen, the lender is going to very quickly slap the property with a force-placed policy. These are outrageously expensive, but you would have coverage.
Second, a burst pipe doesn't, by itself, result in being behind on payments. You later imply the damage still isn't fixed, so it wasn't the costs of repairs that consumed all the money, resulting in nothing being left for the payments.
If she's behind on payments, your new wife's credit is already damaged. A foreclosure or short sale with make it worse. So those really aren't the best options. And if she does have assets or income, they may come after her for the shortage.
Honestly 1) doesn't sound like a modification. Rather, its just the back amount that's due to bring the loan current. Do you have a hardship that would be leverage for a modification? Or is this some sort of predatory loan? Is this property under water? Loan modifications are notoriously difficult to get. And lenders often string borrowers along for many months then deny the mod.
You sort of imply you found out about this after the wedding. Hopefully that's not the case, and you knew the situation going on. If so, I think 1) is the best option. Get the situation behind you as cleanly and quickly as possible and move one. If you didn't know about this, then, I'd really wonder what other skeletons are in the closet. Not a good way to start a long term relationship. Wedding night, "oh by the way, honey, I'm behind on the condo by $12K and the lender's going to foreclose. And there's extensive water damage." That would put a damper on things :-).
Thanks for the replies everyone. I'm not sure if the intention was to actually help or rub my face in it, but thank you for the replies nonetheless.
Yes I married someone that lied to me. Thanks for pointing that out, it definitely helps me to know that going forward.
I believe in forgiveness. My wife isn't good with money and we've had extensive conversations on this topic. Since this isn't a relationship forum, I'd prefer to stick with the details of how to get out of the mess.
This is a loan modification. She has been behind on the payments prior to the pipe burst, but that is what "broke the camels back." She fixed the pipe and paid to have all of the water removed, but there is still damage that remains. Hopefully, that makes more sense, although I'm not sure it really changes the decision at all.
Her lender and I have been working together and they actually stated that I should pursue a short sale and that he has personally seen their exception department make husband/wife exceptions numerous times, so I'm not sure who to believe when you state, "it isn't an option."
This really come's down to where to invest my money. I think that there are still 3 options on the table, but I still can't garner which is the best from the feedback thus far.
1. Put money towards the modification and repairs. ~$24k (up front contribution + repairs); Best option for her credit
2. Attempt to buy the property from my wife via short sale (assuming lender exception granted) and then repair. $36k (down payment & repairs); 2nd best option for her credit, but not as bad as foreclosure.
3. Walk away and use money for new investment property; Worst option for her credit, but does that really matter at this point, since it has already taken a hit? Can our credit ever really combine? Will this hurt my credit going forward?
You should not have to "put money toward the modification" at all...I have been doing them for years now and have successfully completed almost 200 loan mods/ss - in order to get one you absolutely do not need to pay the loan current. If they are asking for a contribution in conjunction w/ the loan mod now that is a different story. You do see that is the borrower has sufficient liquid assets to contribute to the overall workout. Again though, they really should only be requesting her financial information, not yours as you are not legally liable for the loan. Now if you have contributed this information and advised them you have the money and are willing to pay it then that is a different story all together. At the end of the day though it is your wife's income alone that is required and again you can contribute but should only do so to get the numbers where they need to be to get a loan mod approval. As for the exception on a short sale, yes they do occur but I personally have not seen a situation where the investor guidelines allow family members to buy a home in this manner(due to the arms length transaction issue)...doesn't mean it won't happen but I would have my doubts on what you are being told as a professional in this field. If I had to guess based off what you are saying, the person @ the bank you are speaking to it telling you what you want to hear to get you to pay money to them and then when all is said and done the exception for approval of the SS won't happen. I hope you have a different experience w/ them though!
If you have the 12k to bring it current you should do that. Man up and take responsibility for the money you borrowed, because once you get married you are in it together. If you do a short sale or go to FC then her credit is going to take a hit and you will not be able to list her on any future loan apps for several years.
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Thanks Bob. Sharing your opinion and showing your internet muscles helps tremendously!
Does anyone have factual thoughts about the best financial decision/outcome?
This really is a question of credit so I might be on the wrong forum/website.
My wife doesn't care about her credit rating since I'll be handling everything going forward, so the question is from a financial decision should her credit rating factor into which of the three options we pursue? My credit is over 820 so and I make enough money to not need her income on any loan apps in future, so I'm wondering what makes the most sense going forward?
Hi @Beau Benjamin , here's my two cents.
If I had the money to bring the loan current, that's what I would do. It may sting at first, but it will only be a short setback and you'll have the satisfaction of knowing that you and your new wife are satisfying your agreed upon debts as promised.
Your option #2 (buying the property from your wife through a short sale) isn't really an option at all because you can't do that. The banks would never approve it. During the short sale process, both the buyer and the seller are required to sign an "arms-length transaction affidavit" attesting that neither of you are related or affiliated by family, marriage, or commercial enterprise (i.e. business partners). Lying on this affidavit would be fraud. So you can see how #2 wouldn't even be an option.
As for option #3, it's just not something I would ever personally consider because I believe in paying my agreed upon debts and it sounds like you have the ability to do so. I understand there are always different scenarios out there, and sometimes people get into a pickle (i.e. job loss, death of primary wage earner, etc) where they just simply can't make the payments. But this doesn't sound like the case from the way I'm reading your post. It sounds like more of a scenario where you don't really want to make the payments. And I understand that, it's just not how I operate.
Anyway, that's just my two cents. Best of luck to you with whatever route you choose.
I wanted to finish this post off with what happened. After speaking with a real estate lawyer and financial advisor, I was able to get the advice I was seeking.
For anyone that runs across this in the future, I want to tell you that regardless of other people's opinions, performing a short sale and/or foreclosure are VALID tools that are part of our financial/legal system. There will always be moral parts of these decisions and how you layer your moral obligations on top of the decision is perfectly fine, but just don't let other people's opinions force you to do something that doesn't work for you. There is nothing wrong with using the system in which we live to help you get out of trouble, especially if you aren't doing it deceitfully.
Now, my original question was what is the BEST financial decision in this scenario. Let's revisit the options.
- 1. Loan Modification - This scenario essentially cost ~12k up front plus 12k in repairs for a total cost of 24k but it saves my wife's credit from long term damage since it will immediately start improving once consistent payments show up and the bank takes the loan off of a behind status.
- 2. Short Sale - I continued to have my wife's bank tell me this was possible between spouses with a waiver signed by the bank, but the problem was that I never found a bank that would waive the arm's length clause that was spoken about in above posts. Thus while this still might be an option, it seems as though it would have been a dreadful one to complete and probably not work the paperwork/time.
- 3. Foreclosure - This was a serious option up until the meeting with the financial adviser. The financial adviser spoke to us about how the long term effects of this on my wife's credit, but also added the scenarios we might face in the future. If we want to move to a larger house to support the growth of our family in the future, just using my income but having to list all of our combined expenses would cause our free cash ratio to be weaker. However, adding her income would not be possible without adding her credit. Thus we are setting ourselves up for a difficult financial road for up to 7 years using this option. The financial adviser pointed out that 24k is a lot of money for any average family to swallow short term, but looking back a year or two later it will dissipate into the larger view of things and everything will be better off for having went with the loan modification. (I think this was what @Bob E. was trying to say above, just didn't come off that way)
- 4. Deed in lieu of Foreclosure - This was an option that had not yet been discussed on this post. However, this is a very good option for people that are just trying to cut bait and move on with their lives! I learned of this option through speaking with a real estate lawyer. They recommended it if putting the 24k up front just wasn't an option to do the loan modification. This saves the credit from being hit with a foreclosure and also sets the loan account to even and closed, thus no more late account reporting on your credit. Banks will sometimes do this to save legal costs if they think the property is definitely going to go to foreclosure. It saves ~6mths and lots of legal costs and paperwork so it is usually a better option for all involved. This usually just works for people who have another way to live as it obviously would be difficult for someone that was living in the house and had no other place to go.
My wife and I were able to go with option 1 - Loan Modification and her bank even worked with us and split up the lump sum payment into 2 chunks ~4 months apart to make it easier on us. There was nothing about any of this that was easy, but we are very excited to be on the last leg of it and getting life back to normal. Thank you to everyone who posted and I hope the post helps someone else out in the future that might want to know more about these property/bank options that are available.
I'm glad it worked out, and getting the loan current again is likely the best for the future. But, just a couple of clarifications. A Deed In Lieu is still a big hit, credit and financing wise. The same waiting periods for anew mortgage apply to a DIL as to a foreclosure (it's worse than a short sale), just look at some FNMa/FHA charts comparing the three. Most lenders require you to market it and attempt a short sale before they'll consider a DIL... They Don't want the actual property, just the money.
As to the short sale between spouses, you stated "I couldn't find a bank that would waive the arms length clause". Huh? You don't "shop" for short sale banks, it's the lender that gave you the loan you deal with, as they have to agree to any short.
Updated almost 4 years ago
To clarify, it's actually the investor's guidelines, not the servicing bank, that determines short sale guidelines.
What was your wifes payment and principal owed on her loan prior(no late fees just original} and now what is your payment and principal owed on your new loan mod? What is the market value of your condo?
If you are happy with the outcome that is all that really matters...for clarity sake what your wife got was a repayment plan not a actual loan modification. Loan modifications change the actual terms of the loan itself (I.E. the term, rate or principal amount due in any combination). They are not 4 months long but rather either the remaining term of the existing loan (assuming they did not need to re-ammortize the loan out to make it work numbers wise) or they actually extend them for up to 40 years (depending on program or investor guidelines). If the repayment works then that is great...best of luck to you guys. Just an fyi, if you ever find yourself in the same situation w/ the property you would still be eligible for a mod, ss or DIL.
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