Our current home is underwater. Like many others, we owe more than it would actually sell for in today’s market. We have a decent amount of savings set aside that we plan to use as a down payment for our next house. When we have excess income, would it be better to pay down the principal of our current mortgage, or put it toward a larger future down payment?
We’d prefer that you keep the money and put it toward your future home or retirement funding. While you didn’t tell us how far underwater your home is, any money you put into the home will stay there until you sell it. If the home is too far underwater for you to ever pay off the debt, you’ll have to negotiate with the lender a payoff amount that will be less than the total amount you owe.
If the lender agrees to a short sale, you may have to pay some of the money you have on hand to make a deal. However, if you pay down the debt now, you may still be in the same position at the time of the sale. Furthermore, unless Congress changes the rules, if you short sell your home and the lender agrees to take less than the amount owed to release the home from the mortgage and release you from the balance of the debt owed, you will owe the federal government additional taxes on the balance of the loan deficiency released. Any money you save will come in handy to pay the IRS.
Depending on when you plan to buy your next home, we’d suggest you sit down with a mortgage broker or lender today to discuss your situation and your choices. We’re not telling you to apply for a mortgage now, nor are we suggesting you give the mortgage broker or mortgage lender your Social Security number for them to obtain a credit report on you. What we do want you to do is walk through your current situation with the broker to figure out what your options will be if you short sell your home and then want to buy another property.
Your credit history and credit score will suffer if you follow through with a short sale. Your current lender may agree to allow the short sale, but it will report your final payment as less than agreed-upon full amount owed. That negative information in your credit file will lower your credit score.
You may also have to wait before the next lender will give you another loan after a short sale. While a short sale isn’t as bad as a foreclosure, in both cases the lender usually doesn’t get paid in full. And when a borrower fails to pay a lender back in full and the lender suffers a loss, other lenders aren’t as eager to give you a future loan.
In the recent past, that waiting period has been three to five years, although it might be as short as one year now. Nonetheless, if you have this issue, you might as well talk to a mortgage lender or broker about it now and see if you’re going to want to rent for some time before buying your next home.
Your entire situation needs to be reviewed to see where you stand with your current home and where you will end up if you sell the home.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.