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Should I Stop Paying My Mortgage and Buy the House Across the Street Instead?

It may sound like a nonsense question, but in today’s Miami real estate market, there are folks pondering this very same thing.

Faced with owning a house that has declined in value by 40% or more since they bought it a couple of years ago, people in Miami are wondering why they don’t just let the bank foreclose on them and then buy the house down the street at the new, lower price.

Hmmm! Can someone actually pull this off? I bet with a little creative thinking, it could be done. I don’t know anyone who has actually done it, but I’ve heard people pose the question. Not directly at me, expecting an answer. But as a “what if” scenario.

I’m not here to provide an answer to this question, by the way. But I think banks must be aware that this is a possibility and they’re more motivated to help homeowners stay in their present homes by restructuring their current loans. A lower loan payment can certainly provide the relief needed so a person doesn’t have to think about doing things like this. Even, if thinking is all they’re doing.

I’m sorry we’ve even gotten to the point where questions like this pop up. Bummer.

  1. laurie mindnich

    Maggie, this is has to be one of the most complicated markets on SO many levels. The navigation is certainly like a tightrope walk for many.

  2. Bob Marvel

    FHA on September 19th Mortgagee Letter to lenders talked about heading off this very thing. Here’s an excerpt:

    Converting Existing Homes to Rentals—Underwriting Instructions

    Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA’s ability to help new homeowners.

    Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.

    Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter.

    MORTGAGEE LETTER 2008-25 September 19, 2008 FHA

  3. Maggie Dokic

    Laurie, I couldn’t have said it better. This is definitely not your plain vanilla market. So many different things thrown into the mix!

    Bob, thanks for that excerpt. It fits right in with this. I was told by a mortgage broker that they were looking for a LTV ratio on the rental as low as 50% which rules out a lot of the homes and makes this much more difficult to pull off.

  4. James R Venney

    Maggie,

    Your post highlights a serious problem for the housing market. Referred to as “buy and bail” this practice has been seen with some frequency in California and is starting here in Florida. I don’t think that most homeowners realize that engaging in this practice will not only deepen and protract the current housing crisis (casuing property values to continue falling) but will have long term adverse effects on the economey as a whole as well as their own individual financial health.

    Let’s hope this isn’t a trend that comes into vogue.

  5. jackburton

    Oddly though, I owe 150,000 on my property. One of my neighbors also owes about the same. My property is now worth less than 70,000 and some of my neighbors in similar position have just simply walked away from their homes. They just couldn’t afford them. One of them was auctioned off to a couple who payed 59,000 and the other one is in contract for under 65,000. I imagine that this is not over yet. The government stepping in and helping relieve the bank of the bad debt this should not get better. I see how it would be possible to simply save the cash that I would otherwise spend on my mortgage, live in my property until it is foreclosed(probably about a year or more), and then simply by it back or another property at a very low price with all the cash I just saved. Then I would own the property outright

    hmmmm.. just an idea

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