Hi everyone. I'm not much of an investor, but my current home has appreciated a lot in 5 years so I suppose I qualify. :) I have a couple questions for you guys, but first let me explain my situation...
My wife and I would like to sell our home worth about $265k and we found another house that we really like for a very firm $150k. We're not able to afford our current house payments and would like a larger lot & smaller home. We owe $108k on our home now (FHA 30 mortgage 7.25%) and would like to put $85k or more down on the new property. This would give us a much smaller mortgage bill and make our finances much more workable. We both have pretty bad credit from our current house's foreclosure. It has been reinstated, so it's no longer in foreclosure, but we want to sell it and get into something we can afford. Our income is only about $30k / year and not much of that is documented.
So, here's the main issue: We'd really like to buy the new property and move there before selling our current home. It will be much easier for us and allow us to maximize the selling price by finishing up some cleaning and repairs. The seller is unwilling to do any creative financing to accomplish this and doesn't want to commit to a long contract to allow us to sell our home before closing. We've got $150k+ in equity and it just seems like there should be a way to pull enough of it out to put $85k down on the new house (mortgaging the remaining $65k) before we sell the current one.
I'm guessing this is kind of how it would have to go...
1) refinance home for $210k, leaving ~$95k cash
2) $85k down on new home, finance $65k (9.5%? :crazed:)
3) sell 1st home and pay off the $210k
That would mean about $275k financed until we sold our first home, far beyond what we could make payments on. I guess the big question is: Would any lender give us a loan for the initial refinance, knowing our credit is pretty bad (foreclosure in last 6 months) and our income rather low? Are there any lenders who do such loans for a short-term, knowing we'd sell our house shortly after refinancing (hope that makes sense)? Is an equity loan a possibility?
If closing on the new house before selling our home is not feasible, we'll just offer a 45-day contract and see if we can sell our home by then (assuming she accepts the contract).
I know this is probably a long-winded post and I probably didn't explain everything 100% correctly, but any ideas you might have is greatly appreciated.
Let me be the first to welcome you to the forum, and thank you
for your interesting post.
I'll let more of the experts give you some of their advice.
Just one thing caught my eye: you said you wanted to move
out of the old place to fix it up more. I've always heard that
a house with furniture in it sells better than an empty one because
in an empty house flaws are more noticeable.
Maybe the experts can comment on that too!
Josh I don't think you'll like my answer, but you wanted opinions. When you find yourself in a hole, STOP DIGGING. There are two sides to the finance equation, INCOME and EXPENSE. You need to work on both of them!
Why is your combined income so low? Are either/both of you disabled? How did you ever manage to get into a $108K mortgage with that income? What makes you think taking on more debt is a solution? I know that you THINK working the numbers that way they always work out, but after doing this for 30 years I can tell you that they DON'T.
We're entering (or have already entered) a RE market slowdown. If I were you I'd do the following, some of them simultaneously.
1. Sell the current house.
2. Improve you income
3. Figure out a way to get your bad credit squared away, #2 will work on that.
4. DON'T buy the other house, until you can qualify for some "normal" interest rates, 9.5% in a 7% market is overpaying by THIRTY FIVE %. You'll NEVER reach any kind of financial goal if you overpay for ANYTHING, much less your largest purchase, by 35%.
5. Get on the "Dave Ramsey" program, listen to his radio program, buy (or better still check out the library, you can't afford to buy) his book and learn your way out of this mess.
I know this isn't what you want to hear, but it's what you NEED to hear.
Thank you for your advice. Here's some more info:
We bought our current home when I was working as a programmer and earning ~$52k / year of verifiable income. I've since left that profession because I wasn't allowed any spare time and it was killing my marriage and home-life. My opinions on American life and working 9 to 5 (or in programmers' cases, 9-9) are probably radical in a place like this. Basically, I feel that working for some else with the "promise" of being taken care of is essentially a lie. I have no faith in the wealthy of this nation to treat me fairly for the work I provide. I'm purely independent now, working as a landscaper and selling plants (starting a nursery business). This is really hard with a 55x120 ' city lot with a 1400 sf house on it. So, we want to take the equity in our home and put a lot of it into a cheaper property, giving us a smaller mortgage. The plan is to live with much less debt, not more.
With more land, we'll be able to make more off of our plants and expand our business to give us the income we need, meanwhile lowering our monthly expenses.
Selling our home will not be a problem. The area market has seen a slowing-down since last year, but things are still selling and our figure of $265 is lower than what we would have sold for last fall. We might even go as low as $250, which is a bargain for this area, to get a quick sale.
All Cash: I appreciate your advice. It is, without a doubt, great advice. However, we're weird people in a weird situation with weird goals. If we were to sell our house first, where would we live afterwards with our pets? Tens of thousands of dollars would be poured down the drain into a rental, I would have to go back to working 60+ hours a week and thus toss away any hope of gaining independence. During that time, the property we really want would probably be sold and we'd be back to searching for a suitable property. Until we find a new place, a lot of the money from the sale of our house would be pissed away on rent and other expenses, requiring us to borrow more for the property we find, bringing us right back to the situation we are currently in. Obviously, refinancing first and all that would have it's own expenses, but at least we'd end up with the property we want. In the end, we'll only do it if it fits our bottom line.
I brought up the idea of refinancing our current home just as a temporary solution to buy the property we want, with the intention of selling our current home ASAP after closing on the new property.
In a nutshell: We need a smaller house with more land and a smaller mortgage payment than we've got now. We'll be buying it with about 60% down.
I know some of you will see my comments about working for corporate America as an afront to your own ideology. Although you may feel my opinions are counter-productive, I ask you not to debate about the virtues of capitalism. Let's start that discussion in another forum. :wink:
Wesley: Thanks for your input. We'll be leaving most of the furniture in our current house so we don't have to move it, and so the place looks furnished when people see it.
Thanks again for your advice, guys! Keep it coming!
One more thing about a higher-interest loan:
Financing the new property at 9.5% with 60% down will give us a payment we can afford ($600-$700 / mo with taxes and insurance), allow us to improve our credit and finances, which would then enable us to refinance a year later at a lower rate.
I too live in Florida and just used the skyrocketing appreciation to turn my current home into a rental and purchase another place. I understand what you say about FL real estate still selling but you may not be able to get your price (no matter how much lower than last year) and sell it quick at the same time. I'll say this - PLAN on it taking twice as long as your worst estimate to repair and sell the house. There are always factors that you cannot control - took me 6 weeks to get a window I ordered from a major home repair store. Cost? $342 for the window, ~$800 in mortgage payment and utilities. Expensive to "update the look" and provide a "nicer" rental to justify a higher price.
In your situation I think I'd ask at least half a dozen different realtors what the average time on market for their listings and plan on longer than that. If you can't manage that long then it may be time to think about hitting that corporate grind for another year or two until your credit has cleared up and you can make the "jump" in a more controlled fashion. You may also want to consult a tax attorney/preparer and find out what downsizing may do to your tax obligations... that appreciation may come with a pretty good size cap gains tax.
I will also say this, I'm making those 2 payments but it hurts... Hopefully I'll finish the repairs and have mine rented before the end of the month but my wallet and credit will still be sore for a couple of months afterward. Consider what having NO money to spend on dinner out at McDonalds will do for your wife... and how long you may have to tolerate that position.
Welcome to the group! I didn't read your entire post but from what I gathered sounds like you have made some wise real estate decisions in the past. Seems to me that the rate of appreciation on your current property qualifies it to be defined as a money tree. If you have a money tree or a cow thats yielding golden milk....don't cut down the tree or sell the cow simply let someone else make the payments on it. If I were you, I would consider renting your current property or at least checking into the rental market for your area. Renting your current dwelling would qualify you for more lenient financing loan to values and terms as a non-owner occupant. Make sure you have a home warranty in place at the time of rental to cover repairs then, let someone else pay that mortgage for you while you simply let the equity continue to build up and milk the cow every so often.
Use your initial re-fi to purchase closer to your current income. Arrange for the new tenant's lease to commence at the same time of your closing so as to not affect you debt to income ratio. Just because the owner of your proposed new purchase doesn't want to wait til you remedy your current property, remember that a qualified buyer is the most important ingredient to any transaction. I'm sure that your city is full of houses.
It's never quite as bleak as it looks if you own property. Sounds like you're in a good position to profit.
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