5 Tips for Military Homeowners in Crisis
Nov 05 2008
Across the country, many homeowners are in trouble.
A lot of homes purchased at the top of the housing mania in 2003-2006 are now worth significantly less than the original purchase price. Some markets have seen a 40% drop in home values over the last two years.
Throw in the fact that many of these purchases were financed with non traditional mortgage products such as interest-only (IOs), adjustable-rate mortgages (ARMs) with lower teaser rates that are now starting to adjust and so-call “Option ARMs” where homeowners could choose their payments at the cost of having unpaid balances tacked onto the end of the note. We are now seeing a foreclosure pandemic.
For military homeowners that have to PCS every 2-4 years, this situation can be financially devastating, forcing families to live apart as the servicemember travels to the new duty station and the family stays behind, desperately tying to sell the house.
If installation housing isn’t available, the servicemember will have to rent, putting even more financial pressure on the family.
Walking away from a mortgage or declaring bankruptcy is not an option for most military families, since these moves endanger security clearances (most security clearance revocations are due to financial issues). So what are military families to do?
Consider the following 5 Tips:
Tip #1 – A Good Defense is the Best Offense
If you don’t currently own a house, be very careful before buying one in today’s market. While bargains abound, it takes 4-5 years to break even on a home purchase in a “normal” market. If you are PCSing in a down to flat market, a home purchase at your duty station may not be the best deal. Given the chronic shortage of base housing around some installations, you may need to rent. Before signing the lease however, question the landlord to make sure his or her finances are stable, since your rental property could get foreclosed right out from under you. It isn’t always better to buy a house…so make sure you don’t make an expensive mistake!
Tip #2 – Refinance Now
If you have an adjustable rate mortgage that will adjust within the next year, plan to stay in the home and haven’t refinanced to a fixed mortgage, then strongly consider a refi before the note adjusts. Rates on 30-year mortgages have, unfortunately, risen within the last month and currently hover around 6.4% with no points. That is still relatively cheap money and refinancing now may save you trouble and heartache down the line. In addition, many lenders will now cover the closing costs for refinancing, a big savings for homeowners.
Tip #3 – Renegotiate with the Bank
The Federal Deposit Insurance Corporation (FDIC) is now authorizing certain lenders to restructure loans for mortgage customers that are in trouble. For instance, the FDIC authorized IndyMac Bank to send out loan modification offers to over 15,000 mortgage holders, with an average monthly savings of $430. Several other large banks, such as Bank of America, who now owns Countrywide Mortgage, are pursuing similar programs.
If you are slipping underwater, be proactive and contact your lender. It is easier to modify the mortgage before you reach the crisis stage and the bank is more likely to be a full partner in the process the quicker you get started. Delaying just prolongs the process and costs you more money over the long run. Please remember though, that for years banks were in the business of lending money, not restructing loans. It may take time and perseverance and finding the right person at the bank to speak with.
Tip #4 – Rent Your Unselleable Home, If Possible: In many areas with depressed housing markets, fewer homeowners means more rental demand. If you can’t sell, consider renting.
Being a landlord isn’t for everyone, it is certainly worth a try and beats losing the home to foreclosure. If you have trouble locating suitable tenants, there are some things you can do to sweeten the pot. One strategy is a lease-purchase arrangement, where you agree to credit a certain percentage of your tenant’s monthly rent towards the eventual purchase of the home in return for a slightly above average rent.
This can help you get and retain a better quality of tenant, but make sure the rental income isn’t too much lower than your carrying costs on the property or you could end up with an “alligator” – a rental property that takes a painful bite out of your income each month. It is critical to screen your prospective tenant’s credit before finalizing a lease.
Make sure you get some tax and legal assistance when structuring a lease-purchase if you don’t know all the ins and outs. There are some specific tax savings availalbe through rental real estate that can help “slay” the alligator mentioned above, so make sure you check it out.
Tip #5 – Selling the Home with a Short Sale
If you can’t otherwise sell or rent your property, consider a “short sale” instead of allowing foreclosure or bankruptcy to proceed. A short sale is a negotiated sale where the lender agrees to accept less than the property is worth and forgives the balance of the mortgage, avoiding expensive and time-consuming foreclosure proceedings and keeping the owners credit intact (Note: Not all short sales result in total debt relief…some will require carrying a note back from the bank, but will relieve the monthly payment burden).
In some areas of the country, 50% of current home sales are short sales!
A short sale is a negotiation and should be approached with a “win-win” attitude. Don’t start pointing fingers at the lender or bad mouthing the original loan officer…this just gets things off on the wrong foot.
You are a good candidate for a short sale if:
- You are already behind on your payments
- You can conclusively show the monthly payments are not affordable for you
- You are willing to work hard towards a mutually satisfactory solution with lender, even if the first offer isn’t accepted
A successful short sale involves several steps:
- Find a good realtor experienced with short sales in your area. They can often really assist in accelerating the process and can be an invaluable resource. Also, most lenders want to see that you are actively trying to sell the property.
- Get the property listed for sale.
- Contact the lender, find the right person to talk to and see if the lender is open to a short sale. It may take a number of phone calls to find someone with decision making authority, so be persistent. In some cases, you will need to have your realtor send all paperwork (signed contract, competitive market analysis, loan approval paperwork from prospective buyer and your financial documents) to the bank to establish your need for a short sale before the bank will discuss moving forward.
- Submit documentation to your lender, including
- A letter of authorization to the lender with key information on you and the property that will allow them to work with your agent on your behalf
- A hardship letter explaining why you are seeking the short sale
- Financial information such as tax returns for the last 2 years, your LES and bank statements for the last 2 months, financial worksheet (from lender)
- Listing agreement and property report
- Receive an offer on the property (your agent will likely have a specific pricing strategy for selling your home quickly).
- Submit the offer to the lender and be prepared for some offer/counteroffer if they don’t accept the first offer.
If all goes well, the lender will accept the short sale, you can close on the property and get on with your life! Be advised that it may take 90 days (or more) from the submission of your executed sales contract before the bank acts on the short sale. They are in the business of lending money – not forgiving debt – so don’t expect instant approval.
Short sales can be tricky and require a strong commitment to see it through from end to end, but it can be far better than the alternatives. They also save the bank thousands in foreclosure fees and, as a bonus, the realtor’s commission, most closing costs and even late payments may be covered by the bank. Remember, if you are getting into trouble…don’t wait to act…put an attack plan in place and execute!
Special thanks to Florida realtor J.D. DeBoskey, Major, USAFR (www.allamericanrealty.com) for his assisstance in preparing this article.
It appears that all five tips are more for the individual that was not responsible or utilized sub-prime loans to get into a home that they could not afford. Even the Short Sale seems to be easier to obtain if you are behind on your payments or the home is about to cause you to go under.
I would like to see and hear more about those of us that have done exactly what we have supposed to do and have fallen victim to this domino effect. Many of my peers and seniors have joked at me concerning my lack of wanting to live beyond my means. I have saved and refused to purchase a new car every three or so years. I do not have the toys that many have nor live in excess. Now the joke is on me. Since I have liquid assets, ROTH IRA, Money Market Savings Account and etc…that is taken into consideration over a Short Sale.
Yes, I fully understand that it was my choice to buy vice rent but when one is moving across country with only 60 days notice, time was not on our side and then add pets, it makes things even more difficult. So we purchased a home within our means and now it is PCS time and we have the potential of losing over half of our savings.
I can afford my home no problem at all. What I cannot do is take a massive loss if my home sells at what it is currently appraised at, pay for my current home and new one if this house does not sell, be separated from my family again and all the other things associated due to this current housing crisis in America.
I ask where the fairness is.
Billy – right there with you! I bought a house with a high likelihood of staying for 4-5 yrs. My wife works in a great job here. Like you, I have absolutely no problems making monthly payments and have saved and invested, etc. I was just selected for a great opportunity in my career that requires a PCS at the 2 yr point.
Now, I have a house I probably won’t be able to sell for what I owe. Did I make a mistake in buying? Absolutely. Do I regret that choice? Sure. I’ll learn from this mistake. But right now, I need help.
What I’d love to see? Govt civilians (though not all I realize) are afforded a “guaranteed homesale” program where essentially, due to a PCS, the US govt will purchase the home based on 3 appraisals after a period of time trying to sell. This means you lose money in the short run, but you get out from under the crushing weight. I (and a few friends in similar situations) would be more than happy to carry a loan from VA for the difference and pay back the govt with interest – bank gets their money, govt gets paid back plus interest, I get to keep serving my country. I just don’t have the liquid assets to cover the value-mortgage difference right now.
I am perfectly willing to take a loss on the house – I gambled and came up short this time (by the way this is my 10th PCS in 15 yrs). I can afford to take a loss, but I can’t eat the whole cost of the house.
Where’s the love? Do you open this kind of thing to everyone? Maybe not, but consider your SNCOs/NCOs who are already committed through 20yrs, field grade officers and above, etc.
It looks like there are alot more PCS service members who don’t qualify for HAp than any of these sites are letting on to.We are $20,000 under on our resonably priced affrdable home.The problem like others have stated is we can’t affrd to leave and pay the difference.
The feds created a $550 million savings account for themselves and called it military Mortgage aid.
Hear! Hear!
Copy that, will.
My wife and I have been quite responsible, and feel VERY luck (in a sick sort of way) to have sold our house for just over what we owed in the mortgage.
So everything’s good right? NOT!
After paying buyer’s closing assistance and realtor fees, we still had to bring $25K cash to the table and that’s AFTER selling the house at a price lower than what we paid.
Here’s the RUB… After looking at dozens of web sites on the HAP program, and watching the Army Corps of Engineers HAP site change significantly over the past few weeks, I’ve seen some modified eligibility criteria. This includes noting that you have to lose 10% from the original sale price AND be in a market that lost 10%. So if you’re like us who did everything in our power to get a price right, we likely don’t qualify having lost about 8%.
The closing costs and realtor fees of course are added on top of that. So we took a 16K loss on the price, then lost bucks with commission/closing. Likely NO HAP eligibility.
BUT… we were fortunate enough to be able to have the money to get clear. Unfortunately, the PCS in this market still drives a significant loss. Houses don’t cost 25K. They cost 300K+ in our area. 10% is 30 grand. Commissions at 5% then 13-15K.
We’re going to have the discussion with HAP. I’ll post what I learn.
I’m with you all hear. Unlike some of you, I’m $85K upside down and bought my house 1 Aug 07. We do not qualify for the HAP, due to the timing set by Congress(1 Jul 06). Now I got orders and have to sell, we would not be able to afford the current house and a new residence somewhere else. A short sale process is in the works, however my 2nd mortgage wants us to sign a note for there balance. Why should we be responsible for that balance on the 2nd when it was the companies appraiser that came and appraised our house at a certain amount. If we were to stay we would have no problem continuing our mortgage payments and every payment and all our bills are paid on time. So I ask, where is the fairness in us military having to PCS and take a huge hit, when reality is, its the Government moving us and the government screwing us. there has to be another option for us out there and then again, maybe not. It is a very stressful situation and hopefully we can get some more information or loops given to us we haven’t explored yet.