Find the home of your dreams moments after it's listed - Not after it's sold!

Tips For Leaving An Underwater Home Behind

Ginny…I have house that is upside-down. I’m looking to move, as I’m retiring. Is it wise to pay, say, $30,000 cash if I see a property that I want, or should I try to get financed? I really don’t want a note. Do I have to let my mortgage company know if I buy something else? –Maria A., Big Bear, CA

Maria…You’re in a difficult position,  but you’re certainly not the first homeowner to find herself there. In fact, millions of homeowners are still underwater on their mortgages, and the age of the average American continues to increase, along with the vitality and life span many retirees expect to have after they stop working. As such, I suspect we’ll continue to see and more and more people faced with very similar dilemmas to yours.

There are a number of pieces of information I wish I had from you, to be able to give you a fuller recommendation. How upside-down are you? How are home prices trending in your local market?

As I see it, more important than whether you pay cash for your next home or finance it is the issue of what you plan to do with your existing home. Are you planning to offload it via a short sale, walk away and let it foreclose, sell it and pay the difference between what you owe and what you get for it to the lender, or rent it out until the market recovers?

Your plans vis-à-vis that home have myriad legal, financial, tax and, some would say, moral obligations that intersect with your planning for your next home.

Here’s how I’d advise you to think about this as you move forward.

1. Get local professional advice, stat. You need to get a local real estate broker, mortgage professional, tax adviser and attorney on board to review the specifics of your existing home and mortgage and make recommendations to you on how to deal with that property, and you need to do it immediately. They can help you sequence your transactions sensibly to avoid as much drama and trauma as you can.

For example, you might be inclined to put your home up for short sale and then pay cash for your next home, but if your existing lender realizes you have $30,000 cash in the bank, it might expect you to contribute that money toward the shortfall on your existing home.

On the other hand, if you buy a place first, then apply for a short sale, your lender might look at the recent cash real estate purchase as a sign that you do not truly have any sort of hardship that should prevent you from paying your existing mortgage.

There are also big-time tax and timing issues involved, but I don’t want you to get overwhelmed. I just want you to treat this matter with the gravity it deserves and obtain professional advice from top-notch advisers in your area, with the ability to look at the full set of details about your personal situation. That said, let me answer your other questions.

2. Pay cash if you can. Owning a home free and clear minimizes one of the biggest stresses of retirement so if, after you’ve talked with your advisers and resolved your plans for dealing with your existing home, you are still considering whether to pay cash for your next place or finance it, I would encourage you to pay cash — especially if you’re buying at a price point as low as $30,000.

I say this, with that caveat, because this is one of those issues on which my advice might differ at a higher price point. At $200,000 or $1 million, there are potential opportunity costs for putting that much cash into a home, versus another investment vehicle; the market risks to that investment are greater and the tax advantages of having a mortgage on the property are weighty enough that buying cash isn’t necessarily a no-brainer.

But at $30,000, any mortgage interest deduction would be small and the upsides of having no housing costs outside of your property taxes and insurance would likely outweigh any advantage to taking on a new mortgage at this stage of your life.

3. You don’t have to tell your lender if you buy a new home unless you’re asking it for relief from your current mortgage distress. You don’t owe it to your current lender to tell it that you’re buying another place. However, if you plan to ask it to green-light a short sale or even a loan modification, you will be required to explain what hardship you feel entitles you to relief and to document that hardship by disclosing your financials, including any other property you own and/or the balances of the account(s) containing the cash you plan to use to buy your next one, depending on the timing.

So, I can’t tell you with thoroughness what you should do next with your property and your plans. But I can tell you that it behooves you to make your decision about your next home with some thought to what you plan to do with your existing home, and to formulate both plans and decisions only after you’ve talked with your team of local pros.