Principle reduction and short sale questions

fireguy424 · ‎12-05-2008

I purchased a home in June of 2005 from a realtor that was a family friend. I purchased my home for $179,000 and it is now worth $130-$140k. When I purchased I was advised to do an interest only ARM and an 80/20 split for reasons we have all heard, your house will be worth more in 3 years, you will have so much equity, blah blah blah. My mortgage company has contacted me out of the blue about restructuring my loan to a 30 year fixed rate FHA mortgage. They have advised me they will do a short sale on my 2nd mortgage and do a priciple reduction on my 1st mortgage. I am currently on time with all of my bills and have a credit score of 740. I am able to make my payments at this time, just upside down and in a terrible loan. To my questions:

1. I have asked how this will be reported and I was told Principle reduction, paid as agreed; how will this effect my credit score and ability to secure loans in the futre.

2. How will the short sale effect my credit and ability to get loans in the future.

3. Can the creditors come after the money in the future (he says they will not)

4. Is this a wise option for me to concider?

Thank you for any help I can get!!

Anonymous · ‎12-05-2008

Simply put, no. If the seconf mortgage reports as a short sale you will get killed on your credit score and it will prohibit any mortgage financing for 24 months or more. Also, it is the type of things that could set off triggers on any other credit lines or credit cards causing CLD, closures, or rate jacks. All of these could hurt you rscore more. If they can modfify the 1st loan without negative remarks (and they hold the second) they should be able to modify the second.

The bottom line is that being 30-40K under sucks but is nothing compared to the people in alot of areas whose houses have lost 60% of their prime value. It is alot easier to justify the credit hits when your house is 200K underwater than 40K. I would try to negotiate with them. Offer to refi to a fixed rate at full price if they can so you take absolutely no hits on credit, or try to get them to do laon modifications on both, not a short sale on the second. Or, if you have the financial means, attempt to buy out the second mortgage somehow and then just get them to refi the 1st. Any of these would be a lot better for you.

Now, currently the rates are not going to go up on your loan I assume as rates are really low right now. If they are not going up for awhile, try to get as much paid off in the next year or two as you can, and hope the market catches back up in a couple years. Check into doing bi-monthly payments (split your mortgage in two) as it can help pay down quicker, and try to get extra in whenever you can.

In the end, I would only take the short sale if my only other option was a foreclosure.

Anonymous · ‎12-05-2008

Also, if the lender agree to the adjustments and short sale, they can not come after you.

Lel · ‎12-05-2008

@fireguy424 wrote:
I purchased a home in June of 2005 from a realtor that was a family friend. I purchased my home for $179,000 and it is now worth $130-$140k. When I purchased I was advised to do an interest only ARM and an 80/20 split for reasons we have all heard, your house will be worth more in 3 years, you will have so much equity, blah blah blah. My mortgage company has contacted me out of the blue about restructuring my loan to a 30 year fixed rate FHA mortgage. They have advised me they will do a short sale on my 2nd mortgage and do a priciple reduction on my 1st mortgage. I am currently on time with all of my bills and have a credit score of 740. I am able to make my payments at this time, just upside down and in a terrible loan. To my questions:

1. I have asked how this will be reported and I was told Principle reduction, paid as agreed; how will this effect my credit score and ability to secure loans in the futre.
2. How will the short sale effect my credit and ability to get loans in the future.
3. Can the creditors come after the money in the future (he says they will not)
4. Is this a wise option for me to concider?

Thank you for any help I can get!!

I'm not sure I understand what they mean when they say they are going to do a "short sale" on the second loan. If you're not selling the house, then it's not a short sale.

It sounds like they're offering to write off the second loan, which could report to the CRAs as "settled for less than than the loan balance" or some variation thereof. This would be detrimental to your credit score.

Many lenders are now offering loan modifications to holders of ARMs. It sounds like your lender is trying to do that, but what they are offering might not be good for your long-term credit profile. Based on what you've written, a conventional refinance at the current loan balance is not possible because your debt exceeds the value of your home. Even if you were able to somehow pay off that second loan, you're still going to be upside down on the first (according to my back-of-the-envelope calculations).

What are the interest rates on these loans?

If the interest rates on your current loans are favorable, then an alternative to refinancing/modification would be to simply start treating you interest-only loan as a fully amortized loan - that is, start paying down the principal. However, this does not protect you from future interest rate increases.

It's always good to protect your credit profile to the best of your ability. However, you can't buy gas and groceries with FICO points. If you were forced to sell while still upside down, it could be a difficult task unless you're able to pay off the balance of the loan that is not covered by the sale. If you expect to stay in your home for a while, and if it makes financial sense to be unburdened by the second loan, then the offer from your lender might still be a reasonable option.

fireguy424 · ‎12-06-2008

From what the loan officer is telling me they will buy the second mortgage, I guess making it a short sale.

I do have the ability to paydown the second mortgage significantly on my own, but as you state its hard to buy gas with points.

my interest rates are staying low and they are not set to adjust until July. Should I wait it out and see if the feds do anything with the rates like they have been talking about. Maybe my value would be a litle higher then too?

Anonymous · ‎12-06-2008

Well, if you are negative equity, it may be a one shot deal. If the same bank has both loans, I would see what kind of deal you can get to pay down what you can and get the the house refinanced into a single fixed rate loan. I would not be surprised that since they are offering you a deal now, that no matter what happens with interest rates and the fed, they will not offer again. The fed can't force them to (although it can threaten and attach stipulations to any funds they borrow from them). My point is that if your loan resets in July, you probably need to deal with this sooner rather than wait. No matter what happens with rates, home values are not likely to start goign back up by July and with the current economy (depending upon where you live) are forecasted to continue down for the next 6 months to 12 months. (just not at the pace that happened the last 2 years)

If you do not paln on mivng any time soon or making any large purchases it may be in your best interest to go ahead and deal with this now. Getting the modification now will be much better than having this reset in July and having no good options to deal with it. Just talk to the bank and see what they can do to get it done with the least pain. I would go one way or another though. I would not commit any savings/reserves towards the modification unless it was going to appear on the loan as paid as agreed. That way if my credit took a hit for a year or two, I had some extra cash around for any unexpected purchases.