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Foreclosure on rental property or go into unsecured debt?

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nate_cro
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Foreclosure on rental property or go into unsecured debt?  Reply with quote  

Hello,

I'm new on this forum but I'm looking for some advice. We have a very small rental property that we have been trying to sell for almost 3 years now. It's too small for most people (900 square feet or so), so many people are not interested in buying. We are having trouble keeping tenants renting for a long period of time due to the area of town and the size of the house.

It is a FHA mortgage and the bank is calling saying we need to refinance in order to rent it out (it was originally bought as a primary residence, but got too small for my family). The refinance is the main reason we want to to sell the place, along with having to cover two mortgages if we can't find tenants. We currently moved and have a mortgage on our main residence house now.

My question is this. Should I let it go into foreclosure and wash my hands of the situation or try to max out a few unsecured loans to pay off the mortgage and hope to keep renting it out? I want to let it go into foreclosure since we won't need any credit for 10 years or so. I'm worried about the consequences of this though. The mortgage balance is $45k and the house is worth $50k but like I said, we can't find buyers.

A couple of reasons I think foreclosure wouldn't be a horrible thing in this situation is that the mortgage is only in my name, so my wife's credit wouldn't be effected. The balance isn't huge so a bank might not want to fight it too much to try and get their money back. And it's a FHA loan so it should mostly be covered by FHA insurance which would also be a plus for this situation.

Thanks for your imput.
Post Thu Mar 05, 2015 5:43 pm
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oldguy
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quote:
and the house is worth $50k but like I said, we can't find buyers.


Well, people often say that - but the truth is, no, it's isn't worth $50,000 - if it was worth $50,000, someone would look at it. If you want to sell, you'll need to lower the price until it matches the available pool of buyers.

As for 900 ft being to small - most of my rental houses are between 1000 ft and 1150 ft, that seems to work for most renters. The 1200 ft and bigger are hard to rent, the rent is too high for most young families. But 900 should work - especially for single renters.

As for longterm renters - most of my renters are young families that stay for about 2 yrs - they are saving up to buy their own houses, or they are renting until their jobs become 'permanent' and they know where they will be living.

The reason for the refinance request from the bank is that it is no longer an OwnerOccupiedResidence. Only one of your houses can be listed as OO, the other is NonOwnerOccupied. Lenders see that as a higher-risk loan, they know that owners are much more likely to default on a NOO house (just as you were thinking of doing). The NOO interest premium is about 1/2% to 1% to compensate them for the extra risk. So in todays 4% market, a loan on a NOO is about 4.5% to 5%. Did the bank offer you a refi?
Post Thu Mar 05, 2015 7:09 pm
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nate_cro
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The bank is forcing a refi in the next 6 months which is something I don't want to do because that will cost another $3k in fees. The unsecured debt would be 4.75% interest which is what we are paying on the mortgage now. The unsecured debt would have to be paid back in 5 years and it would total the mortgage payment we are paying now -- around $500 per month. The reason for the difference in years (mortgage is 30 year loan) is that the mortgage requires flood insurance and mortgage insurance. Those both go away if we got rid of the mortgage. (we aren't in a flood zone, almost zero chance of a flood in this area). Since we are paying mostly interest each month on the mortgage, the unsecured debt would turn that around and we would be able to pay more principal each month.
Post Thu Mar 05, 2015 7:15 pm
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Wino
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quote:
Originally posted by nate_cro
The bank is forcing a refi in the next 6 months which is something I don't want to do because that will cost another $3k in fees. The unsecured debt would be 4.75% interest which is what we are paying on the mortgage now. The unsecured debt would have to be paid back in 5 years and it would total the mortgage payment we are paying now -- around $500 per month. The reason for the difference in years (mortgage is 30 year loan) is that the mortgage requires flood insurance and mortgage insurance. Those both go away if we got rid of the mortgage. (we aren't in a flood zone, almost zero chance of a flood in this area). Since we are paying mostly interest each month on the mortgage, the unsecured debt would turn that around and we would be able to pay more principal each month.

Your numbers don't make sense. I have a credit rating over 800, and I've been with the same credit union since I was 15, and I can't get a signature (unsecured) loan for 4.75%. Where are you getting this rate?

Secondly, why are you paying $3K in fees on a $50K mortgage? You should be able to find a lender with about $1500 in fees OR LESS, especially with a credit rating that lets you get a 4.75% unsecured loan.

Lastly, almost nowhere will finance a first mortgage for less than about $60K. I think I'd sell this place at a loss and find somewhere different. You're probably throwing good money after bad. I would NOT let the bank foreclose.
Post Fri Mar 06, 2015 2:37 am
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oldguy
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quote:
I want to let it go into foreclosure since we won't need any credit for 10 years or so. I'm worried about the consequences of this though.


The failure to pay a loan doesn't go away in 10 years, it will be there for life. And refusing to pay on purpose is worse than a bankruptcy - with a bankruptcy you are trying to pay but can't. You are just refusing to pay because you don't want to. So future lenders will not loan to you.
Post Fri Mar 06, 2015 3:41 am
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