Underwater mortgage and no hope in sight?
A reader writes in: she's drowning in her underwater mortgage, can't get ahead on paying off the principal, and has sacrificed everything – including her education – to keep the house.
This week, I’m going to take a look at a few of the longer questions that have been languishing in the reader mailbag. These questions were too long for a regular mailbag post – and deserve a longer answer – but are well worth discussing on The Simple Dollar.
Jennifer writes in with a horror story of a financial entanglement that’s holding back her future:
When I was 20 I was very responsible, great job, went to school full time with dreams of being an attorney and my only debt was from school. All I had ever wanted from the time I was 16 was to own my own house and I had about $13k saved so I decided to take the plunge. Somewhere things spiraled out of control from there.
2 days before I was supposed to close on the house I was told I didn’t qualify for the 30 year conventional loan that my underwriter guaranteed me I would, I was about to back out but somehow he convinced me to add my then common law husband onto the loan/house and to get an ARM so that I could qualify. I was dumb enough to go along with it because we had planned to live together and eventually refinance in both our names anyway.
Well, if that wasn’t dumb enough, I also let the underwriter convince me to put no money down since it “would barely change your interest rate.” So I had one loan for 163k with an interest rate of 5.84% and a 2nd for $40k with an interest rate of 9.69% (yes, I know realize how crazy and stupid that was.) My total mortgage payments were $1,344. I spent the whole $13k to pay off all my debt, closing costs and stuff for the house.
Well, 2 months later I found out my ex had been cheating the whole 3 years we were together, we broke up and fought about whom would keep the house. He made considerably less than I did and wasn’t at all financially responsible so I knew if he kept it, it would definitely go into foreclosure and hurt my (at the time) almost perfect credit. We finally settled that I would pay him about $3000 and I would be able to keep the house and refinance in just my name.
Well that was right around the time that the mortgage bubble burst and I spent a few hundred dollars trying to refinance and it was not happening. My mortgage payments went way up but I was able to modify so that my payments went back down to the original amounts. However, the problem is that the interest rates for both loans are still very high and my payments are barely more than the interest and escrow so now, 4.5 years later I still owe basically $200k.
For the last 4 years I have been doing everything I can think of to keep the house, I barely spend money I have a roommate, I work any extra jobs or overtime that I can but the problem is I just don’t make enough compared to the amount of my house related bills. I have racked up over $7k in credit card debt and spent all my savings trying to just keep my house hoping that the market would turn around and I could sell (even if it was a short sale.)
Meanwhile, everything in my house is falling apart to the point that I even feel guilty charging my roommate rent we have a broken dryer, microwave, sprinklers, swamp cooler…the list goes on and on, but I just can’t afford to fix or replace them. Zillow.com values my house at $185 but I believe it is much lower as the house across the street which is the same size but in much better condition sold for $180.
I’ve considered renting out my house but I really don’t think that I could get more than $1000, I would have to pay rent somewhere else and lose the $400 from my roommate so I would end up paying about the same that I am now (but less in utilities) but it would break me to not have tenants pay for even month. Plus I would have to spend considerable money beforehand to fix up the house and replace appliances which I just don’t have.
I have researched short sales but haven’t had much luck getting info from my mortgage company and people that I know who have tried short sales ended up getting foreclosed on anyways. At this point my bills are about $2200 (this includes barely the minimum on my credit cards, all house related bills, car payment and insurance, the only “extras” are $25 for a gym membership and ½ the cable bill for $25.) I only take in about $2400 (including rent) which means that I only have $200 for groceries, gas and anything that comes up, I have no savings.
I have stopped going to school because I just can’t afford it which breaks my heart and is affecting my future. At this point I just want to walk away and move into an apartment close to work with my roommate which would eliminate my need for a car and many of my bills. I am willing to deal with the hit to my credit as well as the shame and disappointment that comes along with foreclose but the problem is that my ex is still on the mortgage.
I have forgiven him for the cheating (and I am still in the process of forgiving myself for being dumb and easily influenced) and we are now friends. He has been working hard for years to get his credit back on track and trying to get his finances in order. In my research, I found out that the only way to get him off the hook is to refinance which I am unable to do. I really don’t want to hurt him after fighting bitterly to keep the house when we broke up. Do I have any other options? If not what is the best way to present this to him? I really am lost here.
So, let’s summarize your situation.
1. You and your ex-husband both have your names on the mortgage of the house you currently live in.
2. You are in a financial situation with poor credit which makes it difficult for you to refinance the home.
3. You can just barely afford the mortgage payments if you squeeze every dime, including abandoning your education.
4. The expense of the mortgage payment is causing you to fall deeply behind on home maintenance, which is decreasing the value of your home.
The obvious solution is to walk away from this situation, but the drawback here is that your ex-husband’s name is still on the mortgage and you don’t wish to sink his credit.
The first thing I would do is play some serious hardball with the mortgage company. I would contact them and inform them that you simply do not have the money to maintain the mortgage at this point and that if refinancing is not available in some fashion, you are going to be forced to walk away from the property and let the home enter foreclosure.
Frankly, that’s the truth of the situation. The situation you’re in is not sustainable over the long term. If you don’t change anything, you’re going to be middle aged, without an education, and with a house that’s in very poor shape around you. That’s a far worse alternative than most of the other options available to you.
If you can, request manual underwriting. Why? If they put your situation into the typical kinds of computer models used by lenders, they’re going to just reject you. Without a deeper look at the situation, there’s no case for refinancing you. Why should they, if you’ve been keeping up with your payments?
What if your hand is forced by the lender? If you cannot convince the lender to refinance, then you’re going to have to sit down with your ex-husband and discuss foreclosure on this house. He may want the house instead of you at this point, depending on what he’s doing and what his skill set is. He may also have other suggestions based on your personal history and relationship that might make sense.
Regardless, you have to leave this current housing situation behind you. If that means simply handing the key to the bank, so be it. The credit impact will eventually go away, but if you stick with your current situation, it will crush your freedom for a very long time.
At the same time, get back to your education. Walking away from your education at your current age is something you’ll regret for a long time, as it will not only negatively impact your earning potential for life, but it also represents other lost opportunities because of the relationships you build during those college years.
How can you go back? It’s not going to be easy in your situation. I would look into community colleges in your area, for starters, until you can resolve your housing situation. Once you’re free, look for hardship scholarships and grants, as it certainly sounds like you would be in a hardship situation.
One final note: I find online property value estimators like Zillow to be almost useless. Over and over again, I find that you get much more realistic estimates by looking at similar homes in your area and finding out what they sell for. Over and over again over the past few years, Zillow has shown housing prices that have been very poor reflections of the realities of specific local housing markets. I think the site has value in a very broad sense, but in terms of figuring out exactly what your house is worth, I’d trust the local market much more.
Good luck. Today is a great day to turn the page on this chapter of your life.
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