Options for underwater home if I want to move

[Steve Ellison]

Hello.  I have a simple problem which might have an obvious solution, but I’m hoping that someone more knowledgeable can provide feedback in case I’m missing something.

I bought a very nice condo/apartment in a new mixed-use development as my primary residence.  Unfortunately this was in 2007 and things quickly deteriorated.  Condo buyers backed out leaving the building half-empty.  Neighboring residential and retail development stalled and ended up in foreclosure.  Eventually all of the units sold for rock-bottom prices.

Fast forward to 2015 and although not fully recovered, the neighborhood is on the upswing with new construction and is guaranteed to be a more desirable location in the next 2-3 years.  But I need to move in the next year.  I can easily find a preferable house for the same (or somewhat lower) monthly payment.  Unfortunately I’m at least $75,000 underwater.  The condo is an ideal rental property (the immediate area has a high concentration of rental units), but if I rent at current market rates, I will lose more than $6,000/year.

I already did a HARP refinance six years ago, so that option isn't available. My front-end DTI is 28%. I am frugal and comfortable with my monthly payments, which I have never missed, and I have excellent credit and no other debt.

Assuming that staying is not an option, renting it seems to make the most sense.  Instead of coming up with $75,000 upfront to sell, I would only have to come up with $6,000/year to cover my rental losses, with the assumption that my equity will increase over the next few years (and maybe rental rates will increase too).  However I assume it’s impossible to qualify for the new mortgage based on this debt.  From what I’ve read, I’d need a year or two of rental income and not all of it would be recognized.  I’ve only talked to one lender and he said the same thing, which obviously isn’t possible while I’m living there.  Do I need to move to an inexpensive rental property in the meantime so I can start establishing rental history on the condo?  Or am I foolishly attempting to live beyond my means by trying to buy a house while I have this debt?  I guess I could walk away, but that doesn’t help in my goal of buying a new place.

Any thoughts or creative solutions?  Thanks in advance.

[Jesse T.]

Is your $6K figure just rent minus mortgage payments or does it include costs like property management/vacancy/repairs etc?  You might talk to your mortgage company about options for selling and handling the deficiency as an unsecured loan.  Depending on the terms it might be less than $500/month+repair/maintenance/etc costs.

The costs/complications might make it hard to do this, but what about buying your next property with seller financing and using it as a rental initially?  Once it has established history, you could probably get an investment loan on it.  Another option if you can get seller financing would be finding something where you can cover the costs with your rental income.  So your housing costs will be similar.