***I must preface this article by saying it is imperative to contact an attorney or CPA regarding any short sale strategies you may be considering. The below is provided for informational purposes only***
It is no secret that doing a short sale will have some sort of a negative impact on your credit and you will have a waiting period before you can qualify for a home loan again. But what if you planned ahead and bought a home first, then did a short sale on your current home? Is that possible? The short answer is “Yes”, it is possible, if you can qualify and you have first consulted an attorney and CPA.
Let’s take an example situation. The “Jones” as I will call them, live in the East Bay and bought their home in 2005. They owe $400K on their home and it is now worth $250K. They applied for a loan modification in 2010 but were denied. In the last 6 years they have had 2 children, one of which is about to enter the school system. The Jones have realized 2 things:
1) Their house is getting a little cramped and they would like something larger
2) They are not in the school system they wanted to be in for their children’s education
So they would like to move into something larger and in a different area, but they cannot sell their home as a regular sale since they owe more than it is worth. Their first thought is “We are stuck here until the market comes back which could take 10years or longer to do.”
What they may not have realized is they may actually qualify to purchase another house while still owning their current home. So they contact their mortgage lender and find out what their options are to do this. Both Mr. and Mrs. Jones have good jobs, make good money, never had a mortgage late, and have some money for a small down payment (in this case FHA financing at 3.5% down). They find out they can qualify for the loan on a new property (fully disclosing to the lender that they already own a home and what the balance owed is), and subsequently close on their new home. Right when they close on their new home they list their old home for sale as a short sale. They fully disclose to their lender that they have bought a new home and would like to proceed with the short sale on their (old) home. After providing all required information, their lender must determine if they will approve the short sale and what they may ask the homeowner for in return. They may ask the homeowner for a cash contribution, or perhaps a promissory note. Maybe they won’t require anything from the homeowner. Assuming the homeowner agrees to the terms of their lender’s short sale approval, they successfully close on their short sale.
Remember, this strategy only worked because the owners planned ahead and had no mortgage lates! Otherwise they would not have qualified for the new home. They also consulted with an attorney and CPA before proceeding with either transaction.
Two important points to make:
1) Some people may question “Is this practice of buying a new home and selling the old home legal?”. This is where you first need to consult with an attorney! Make sure your attorney explains if doing this may constitute “Strategic Default” or “Buy and Bail” for your situation and what legal ramifications may exist, if any. Remember, you must always use full disclosure when dealing with the banks. I will not address any “moral” or “ethical” considerations of this strategy as that is up to the homeowner to decide.
2) Even if you successfully close on the purchase of your new home, there is no guarantee that the lender will approve your short sale or what the terms/conditions of that approval may consist of.
Feel free to contact us for more information and resources for buying and selling your home, whether a regular sale, short sale, or REO!
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