Can We Buy a New House and Short Sale Our Old Home?
A reader asks: "With home prices so low, we would like to buy a smaller home. The trouble is our existing home is underwater, so we would need to do a short sale to get rid of it. Our question is should we short sale our existing home first and then buy a new house? Or, would it be better to buy a second home and then do a short sale on our first home? We don't really know how this order works."
I hate to be the bearer of bad news, but there are problems all around with either solution.
Banks grant a short sale for a variety of reasons, none of which involve helping out the homeowner. So, the notion that you can simply buy a new home and petition the bank to let you walk away from your mortgage is unlikely, but there are circumstances under which a similar premise might work.
Buying a New Home After a Short Sale
To answer your question, let's look at the first scenario. Doing a short sale and then buying a new home. You have three ways to go regarding the sale of your existing home as a short sale:
- Mortgage in Default
Lenders typically grant a short sale because the sellers have a financial hardship. If you have a financial hardship and have stopped paying your mortgage payments, then you probably won't qualify to get a loan to buy a new home.
- Mortgage Payments are Current
If your mortgage payments are paid on time, your bank might conclude that you do not qualify for a short sale because you do not have a hardship. Doing a short sale without a hardship is tricky. The short sale bank might ask you to make a seller contribution.
- Mortgage is Current But About to Go into Default
It is your best scenario, but again, some investor guidelines won't allow a short sale unless you are in default. Falling behind on your payments will reflect poorly on your credit report as a 30-day late, 60-day late and so forth. If your FICO score falls too low, you will not qualify to buy another home.
Although Fannie Mae guidelines and FHA guidelines offer provisions for sellers who have not missed a mortgage payment, bank overlays do not follow suit. FHA specifically prohibits making a loan to a buyer who did a short sale for the sole reason of capitalizing on declining values. One exception is a job transfer and moving an acceptable distance.
Buying a New House and Doing a Short Sale on the First Home
To buy a new home, most home buyers get a mortgage. A new mortgage involves showing the lender your tax returns. Your tax returns will indicate that you own a home. It is very easy for your new lender to find out that your home is upside down. The mere fact that you owe more on your existing home than it is worth is enough of a reason for many underwriters to kick your file out of underwriting and deny the loan.
- Buy and Bail
Why would the bank deny your loan if you are current on your mortgage payments and have an excellent credit report? Three words: buy and bail. Buy, and bail is considered mortgage fraud. If you lie and say you plan to keep your existing home when your intention is to walk away, that might be considered mortgage fraud as well.
- Qualify to Own Two Homes
Some home buyers make enough money to qualify to own two homes. If your credit report is golden, and your ratios support a new loan without relying on rental income from your existing home, it is possible that the bank might let you buy a new home, even if your existing home is underwater.
- Strategic Short Sale
It is very unlikely that the bank will grant you a strategic short sale on your existing home after buying a new home -- even if you do meet the qualifications to own two homes. The bank will not reward you for your financial smarts to think ahead. Furthermore, the bank will see that you had previously qualified to own two homes, and you enjoy a good credit rating; why should the bank let you off the hook at this point?
The twist in all of this is if you have a financial hardship, then you won't qualify to buy a new home in the first place. However, if your financial hardship was sudden, without notice and extreme, you might qualify for an exemption.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.