jd asked,

Jim,

Do you have any recommendations for homeowners* who are under water?

*Homeowner current on payments, didn’t buy “too much” home, but neighborhood is collapsing around them”

It depends if you want to move or not.

1. If you don’t want to move.  All you can really do is work on your own situation by paying down your loan(s) faster.  Add an extra couple of bucks monthly to your regular payments, and knock out big chunks when possible.  It has been suggested that the lenders holding second mortgages that are underwater should be happy to get anything, so they might be more negotiable about a payoff amount.

If you have ambition, you can volunteer to be the neighborhood cheerleader, and every time a house comes on the market you alert everyone you know who might want to buy it so at least they sell quick.  You may end up being a realtor eventually, but that’s another conversation!

2. If you DO want to move, there are options.

a) Buy your next home in an area where you can qualify for both the new and old home – because they won’t allow the rent of the old house to be used as income yet.  It means that the new home might not be as glamorous as you once hoped, but it is certainly possible.  This is probably an option for those who are willing to leave town, and buy where it is cheaper.

b)  You can go rent a new residence for one year, which might not be a bad idea if you were already thinking of trying a different area.  Once your old house has been rented for 12 months, the mortgage guidelines will allow that rent to be used towards your qualifying income for the new house/mortgage.

c)  The third and least-desirable option is to work the free-rent program.  Once the Homeowners Bill of Rights goes into effect on 1/1/2013, lenders won’t be allowed to initiate foreclosure proceedings against you until the attempts to modify your loan are exhausted.

This will probably tack on an additional 12+ months to the existing free-rent programs, because you could stall and delay for months trying to provide enough data for them to come to a decision.

It will be interesting to see how diligent the lenders are in pursuing these loan modifications.  They will also be required to have one contact person per file, but they can probably robo-clerk these files by committee.  I wouldn’t be surprised if your contact person is Bill Smith, and he always sounds a little different every time you talk to him.

If you do work the free-rent program, it might be smart to take a shorter version just to re-start your ability to get a new loan sooner.  Figure that it will only take 3-4 years before you can qualify for a new loan, but you’d have to re-establish credit and use at least a 20% down payment.

The public scorn about foreclosure is a lot less than it used to be, and you can do either that or a short sale with hardly anyone knowing anyway.

Do what you think is best for you and the family, and stay put if you can!