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catoismymotor (74.96)

What the heck is my friend thinking?!

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November 03, 2009 – Comments (7)

A friend of mine has an idea that I think is not sound. He owns house A but wants to buy house B. House B is desirable because it is a better fit for him and his family and it is selling for 30-35% less than its estimated market value from last year. This would make his monthly payment on house B less than house A. The house is not in a neighborhood that is full of oversized MacMansions, just a good middle class neighborhood in the burbs. He wants to get a loan for house B from a new lender and then in good faith try to sell house A to pay back the loan. What worries me, but not him, is that he is comfortable with giving the home back to the bank that has the mortgage for house A if it does not sell in short order. He is not worried about the hit his credit score will take should he decide it is best to give up house A because he says for a number of years he will not take out a loan for anything after the purchase of house B. He regards surrendering house A as a business decision. I think this is a bad idea and I have told him so.

What do you think of his line of thinking? As always I appreciate the input of fellow Fools.

Cato

7 Comments – Post Your Own

#1) On November 03, 2009 at 9:18 AM, brickcityman (< 20) wrote:

Sounds nuts to me... 

 

This person needs to ask themselves a number of things... 

 

First what kind of line of work are they in?  Sometimes dinged up credit can hamper transitioning between jobs or even put your current job in jeopardy.

 

Second, does this person have enough free cash to pay for say a new HVAC or other major home expense?  If their credit is dinged up it will not only hamper planned purchases, but also unplanned ones.

 

Third, I hopefully will never find myself in this position, but I imagine there is a big difference between walking away from a large loan (such as a mortgage) and something much smaller (like a car or credit card).  So this draws into question just how long this person expects this to effect their credit and how realistic that assessment is.  Have they vetted this with say a credit counselor of some kind?

 

And finally, have they become too emotionally attached to targetting a specific property?  Speaking from experience I know its possible to feel like you must "act now" to secure the perfect house you just found...  But also speaking from experience if you end up walking away without it there is no reason not to expect that you might not find something just as good or better shortly thereafter!  The home I "own" (bank owns most of it) now was not the first home we put bids on, but in the end I think we came away better off by not closing a deal on our first choice.

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#2) On November 03, 2009 at 9:25 AM, outoffocus (24.45) wrote:

I'd like to add one more thing, who says that a new lender will extend him new credit while he still has a mortgage on his current property? Shenanigans like may have worked a couple years ago but the banks have been burned and they are not likely going to be involved in such ludicris transactions anytime soon.  Tell him to sell  his house first THEN go for the new loan. If the house doesnt sell then it wasn't meant to be.

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#3) On November 03, 2009 at 9:41 AM, russiangambit (29.88) wrote:

Yes, tell him put his house A on the market now and see how it goes. Also, it will be easier to get a mortgage on the second house in this case. Though, it will be a very hard sell to get second mortgage if he doesn't have enought assets to easily afford second house payment and 20% down.

How much would he save defaulting on house A? I don't think 10-20K are worth  destroying the credit. If we were talking 50-100K, then it is different.

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#4) On November 03, 2009 at 10:18 AM, catoismymotor (74.96) wrote:

#1 - We went through the same thing with the first home we were serious about. After we but in a bid we learned it had LP siding. It broke our hearts to withdraw the bid. It was a lovely home.

I explained to him that a credit history means a lot when looking for jobs and so on. I don't think he truely gets it. Arrrrgh!

#2 - I suggested he sell the home and maybe rent it from the new owner while he and his wife look for another. He is just too eager to jump on this deal to think clearly. I've known him since middle school. In many ways he is still that same kid I first met.

#3 - I suggested that he just hold on to the mortgage and just take the tortoise approach right now. The difference in his house payment would be $200 a month, I think. I told him the savings would be great but the worry I would have is selling his current home. According to him he is not underwater on the loan and the market price is a little less than he paid for it five years ago. I do not know what resource he is using for the current market value of the home. I suggested he refi and hold on for a few years. I also told him that I doubt his home would fetch his asking price and defaulting on a loan by choice, should it not sell quickly, would be bad on may levels. I am not familiar with exactly how much he would be defaulting on at this point.

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#5) On November 03, 2009 at 10:24 AM, JaysRage (93.76) wrote:

If that is how he approached purchases in the past, what makes him think that he's going to be able to get a loan for house B without selling A in the first place?    If he can afford both houses, he's a fool if he's thinking that Bank A isn't going to come after him legally.   Walking away is not going to be easy.   It will be a big ugly legal mess, and he'll pay the penalty in time and effort and money to work his way out of that mess and end up much much worse than he is now.   Frankly, he has no idea what he is getting into, and you should talk him out of it.    Besides the total lack of ethics, the logic is flawed.  

Since he would clearly be over-extended, he should not be able to buy the second house anyway.   If he is not, Bank A isn't going to let him walk.   Lose-lose.  

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#6) On November 03, 2009 at 10:27 AM, vriguy (77.88) wrote:

Brickcity has it right - your friend is in love with the property and that usually means he has a high probability of being burned during this deal.  Don't buy B, then sell A. Instead, put A on the market and make a contingent offer on B.

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#7) On November 04, 2009 at 1:05 PM, Mark910 (< 20) wrote:

Sell A and move into a trailer...if he has no intention of paying off a loan he takes out he has no business owning a house,

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