Home Sale Hindsight
Q: I went late on my mortgage payments in order to get a loan modification. My lender did reduce my payments, but not my principal balance, so I’m still way upside down. I decided to walk away, but I wanted to buy another place first with my Veterans Affairs (VA) loan certificate. The mortgage broker told me I can’t qualify because of the late mortgage payments.
I thought I was being strategic with my actions, and asked around and got advice from all sorts of friends and accountants, but it seems like I’ve ruined my chances of getting out from under this place, anyway. What did I do wrong?
A: Well, friend, you appear to have fallen victim to several of your own incorrect assumptions and fallacious lines of reasoning along the course of your decision-making process recently.
First off, you incorrectly believed that principal reduction was even a reasonable outcome to expect from your loan modification. The data shows that just over 1 percent of loan modifications actually include principal reduction.
So, if that was the only outcome of your modification process with which you would have been satisfied, the better bet would have been to stay current on your loan and select another course of action before you impaired your ability to qualify for another loan.
Secondly, you did not keep up on the rapid evolution of loan qualification guidelines. Today, it is impossible to qualify for any sort of federally insured loan or loan that will be resold on the wholesale loan market if your credit report reflects any late mortgage payments within the last 12 months.
Third, you’ve repeatedly and wrongly assumed that you can simply have whatever you want, without accepting that your current situation is the result of commitments and decisions that you made, as in the commitment you made to obtain your mortgage. You seem to be operating under a sense of entitlement to a lower mortgage balance, to walk away and still get a deal for another home on today’s market by trying to pull off a "buy and bail."
Fourth, please consider that your process of obtaining advice might have been misguided. I see so many real estate consumers take their real estate advice from other people who are simply groping their own way through mortgage distress, or trying to get free advice from professionals by giving them a tiny piece of the full picture, asking them a quick question at a party or even writing in to advice columnists(!).
When you are trying to chart out as important and potentially life-changing a path as the one you’ve taken, you really need to sit down and consult with a team of professionals in the relevant areas of expertise who will look at your entire situation, holistically, and with their eyes on your endgame and ultimate life financial goals.
Getting scattershot advice in bits and pieces because you’re not willing to pay for or take the necessary time to gather up a full set of custom, expert advice is really unwise in a situation like yours.
For example, in your situation, I would have urged you to talk with a local real estate lawyer, real estate broker, mortgage broker and maybe even a CPA or tax advisor before making the drastic move of stopping your mortgage payments.
Between them, they might have asked questions and provided advice that provoked you to think about whether you were willing to give up the ability to buy again in the near future, in exchange for the unlikelihood of getting your principal mortgage balance reduced.
One of the hardest parts of obtaining advice from a team like this is that they might very well provide conflicting advice, forcing you to do the very grown-up work so many of us avoid of getting clear on your own values and goals and making tough decisions to keep your actions in alignment with those items — even when the "right" thing to do is less than 100 percent clear. Overall, it does seem like you have repeatedly made the mistake of trying to take an easy way out of a hard situation.
I’m concerned you might be continuing on this path of logical missteps by assuming the "right" course of action is to ditch your current house. While real estate is certainly a unique asset class, homes are similar to other material assets and possessions in that their value varies over time. If you were planning to stay in your home at the beginning of this path and you can afford to do so, you should rethink your belief that you should deviate from this path because your home’s value has taken a hit.
By ditching your home now, you lock in your actual losses on the property, and don’t give yourself and this asset the opportunity to recover the lost value, which it is highly likely to do over time. How long it will take depends on where you are geographically and the other puzzle pieces of your holistic financial situation.
To avoid repeating your past mistakes, I’d encourage you to make a serious project of sitting down with your trusted real estate and mortgage brokers, at the very least, to put in place a plan for recovering your credit and your finances from your personal, but temporary, recession.
Ask them who else you should talk with, and consider meeting with a bankruptcy attorney, who can offer some real tools (with real advantages and disadvantages) for reducing your mortgage debt load.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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