should my friend do this

[svt4cobra6]

Nevada,
My friend purchased a house in April 2006 in Las Vegas, primary residance for 304k. The forclosed houses in his neighborhood are going for 150k as there are quite a few. He was talking to a broker and they said that he could purchase the house accross the street for 150k at a better interest rate (fixed 30 years) than he has at his current house as long as it closes before his original house goes into forclosure. Since forclosures are taking 6+ months it should not be a problem. Also when his house goes into forclosure it will effect his credit but not his 30 year fixed loan. Does this seem ligit and can he still be charged for the 150k lost on his first house when they resell it for 150k?
Thanks Jason.

 

[cosine]

Nevada,
My friend purchased a house in April 2006 in Las Vegas, primary residance for 304k. The forclosed houses in his neighborhood are going for 150k as there are quite a few. He was talking to a broker and they said that he could purchase the house accross the street for 150k at a better interest rate (fixed 30 years) than he has at his current house as long as it closes before his original house goes into forclosure. Since forclosures are taking 6+ months it should not be a problem. Also when his house goes into forclosure it will effect his credit but not his 30 year fixed loan. Does this seem ligit and can he still be charged for the 150k lost on his first house when they resell it for 150k?
Thanks Jason.

He will be liable to the bank for the full loan balance. They can sell the house and apply whatever they get to the loan balance. What remains he still owes.

This is not generally a good idea. For one thing, the bank does not have much incentive to try to get more for the house since whatever they don't get, he still owes to them. The bank won't do any cleanups or fixups to make it sell better. The bank also wants a quick sale since they are probably low on liquidity right now, which will mean a lower sale price and more your friend will owe to the bank.

The only reason one might want to buy foreclosed houses is if they can resell them higher than they bought them. Many people are doing this and making money because they are willing to wait for buyers and/or do fixups, cleanups, and improvements to make the house sell better. Your friend should not get into this unless he has the financial position to handle it (which he doesn't if he can't pay on two mortgages, much less the first one).

The best advice for your friend is to do everything he can to avoid foreclosure. He should talk to his bank to see what he can do to renegotiate his loan. If he has some spare cash now, he can be in a better negotiating position by offering to lower the balance. That can get the bank's attention since they want more cash sooner whereas a interest-only negotiation is less interesting to them.

Is he current on the payments?

 

[svt4cobra6]

Hi thanks for the response. He has exellent credit and is current on the payments. He said he contacted the bank to try to get the balance reduced since prices here were way over inflated but they said the only loan mods they are doing is for people behind on payments and they are not reducing the princable, just extending the time of the loan.

 

[racer72]

Your questions were answered in your previous posts and the answers have not changed.

 

[cosine]

Hi thanks for the response. He has exellent credit and is current on the payments. He said he contacted the bank to try to get the balance reduced since prices here were way over inflated but they said the only loan mods they are doing is for people behind on payments and they are not reducing the princable, just extending the time of the loan.

OK, so he's just trying to get a better loan/mortgage deal. Buying another house and letting the current mortgage default and foreclose is a dumb idea. It is especially dumb if his credit is currently excellent since doing such a dumb thing would ruin it.

What he should pursue is refinancing. That is basically making a new mortgage and having the old mortgage paid off by it. But if he currently owes more on the old mortgage than the collateral (house) is worth (or more specifically, about 80% of the collateral given the shortage of capital these days), he's not going to get refinancing to cover the entire old mortgage. No smart lender is going to make a mortgage that is immediately upside down. Most are going to want to limit their mortgages to not more than 80% of collateral value, and possibly even less than that.

OTOH, if he's willing to make a refinance downpayment that makes the refinance mortgage at less than 80% of the current market value of his house, he may find an interested lender. Refinancing can be done at both the current bank as well as competing banks. But he needs to make it business worthy for the banks to make the new mortgage.

Even if he can't, paying down a high interest rate mortgage with cash on hand will reduce the interest cost. He needs to do the math and figure out how that plays out against his other alternatives to do with the cash.

 

[svt4cobra6]

thanks for the additional responses. The house is worth about 130k less than what he owes on it so refi is not an option. I will pass the information along for him to just stick with his current mortgage and hope the value goes back up in 5 or 10 years so he can refi. Unfortunately he purchased the house when prices maxed out to about $200 per square foot.

 

[cosine]

thanks for the additional responses. The house is worth about 130k less than what he owes on it so refi is not an option. I will pass the information along for him to just stick with his current mortgage and hope the value goes back up in 5 or 10 years so he can refi. Unfortunately he purchased the house when prices maxed out to about $200 per square foot.

His best option at this point it to cut all his other expenses to the bone and pay down that mortgage as fast as he can possibly push it. The value of the home (eventually) going back up should meet the balance on the mortgage sooner that way. Maybe interest will still be low enough then to make it still worth refinancing at that time.

The only expenses that might be an exception are those that actually increase the value of the home by significantly more than what is spent to do it. The more he can do to improve the value of his home himself, the lower those costs. And where he does need to hire labor for such improvements, right now those costs are lower. So if he has any improvement ideas that require hiring construction labor, now is the time to do it. It just depends on what extra he has in his finances.

Long term, things should improve, and hopefully he'll also own his home free and clear by then or soon after. That and excellent credit and he can move up if he so desires, or start a business, or retire early ... whatever his preference. He's in a much better position than most of his peers that bought in when he did. Don't ruin it.

 

[svt4cobra6]

Cosine, sounds like good advice, will pass on the additional information.