Is there anything I can do?

[Brian B]

I was wondering if anyone could give me advice on what to do regarding my underwater mortgage. I understand I have a bunch of options but I'm not sure which one is best. I am a teacher; my wife is unable to find a full-time job so she tutors 10 hours a week. We have a one-year old child. We pay our bills on time (95% of the time...sometimes I make mistakes), but at the end of the month once bills and living expenses are paid we have nothing else. We have some CC debt, about $13,000, plus student loans totaling about $40,000. We are underwater on our mortgage. Our condo is tiny for our family and we would really like to get out of it to save money, rent and streamline so that we can have another child and have the space in the budget and the space in an apartment/house to accommodate it.

In 2007, my wife and I bought a condo in Pennsylvania for $135,000. We got 100% financing. I had just gotten a big promotion and the promise of another, so we bought it with the idea of renovating (it's a little bit of a fixer-upper, not much) to either "flip" or rent out once we did the work and refinanced and paid down some principle to gain equity and lower the payments. That never happened. We did get to do the kitchen before the bottom fell out and my wife and I (who both taught at the same school) found both our salaries cut by 25%, my promised promotion (and future raises) gone, and our savings decimated. Now, we have very little savings. After our child was born my wife could not get her job back. I did get another job, which combined with a timely refinance has kept us afloat, but barely.

We are not behind on payments of anything. But, we are underemployed and have very little money. Getting out from under this property with it's tax load and condo fees and debt would go a long way toward helping us get long-term comfort, but I don't know how to do it.

I know most will recommend to stay the course, but this condo has become a massive burden.

I'm not sure about renting the place out, because I don't think the monthly rental would cover the mortgage plus the condo fees (which, together with taxes and PMI totals about $1050). Plus, if I did that I'd have to pay income tax, and our budget doesn't have space for it.

If I sell, I'd have to short-sell and damage my credit, and have no money to pay realtor's fees.

What should we do? Are we stuck here? I know we would be much better off financially and even emotionally if we could rent a bigger place in an area with a lower cost of living, which is closer to my work (as of now I commute an hour each way). At this point I'm thinking the best way out is to take the big credit hit for a few years and walk away. We don't use our credit cards anymore, and we've cut back significantly...we can live on cash.

What would you do?

[Jon Holdman]

First, I'm very sorry you've ended up in this situation. You, like many people, got caught up in the bubble.

Unfortunately, there is no painless option. A short sale, foreclosure, or bankruptcy are all going to have long term consequences. Renting the place is almost certainly going to cost you money out of your pocket. And staying doesn't seem like an option.

FIrst, I would not try to rent it. Do realize, though, that you only pay income tax on the net income, not the total rent. So, if you actually do owe additional income tax from the rental, it will be because you're actually making money. That said, unless you can get something like $1500-1800 a month, I doubt you will have any profit. If you're the ONLY owner occupied unit in the building, you have lots of competition.

Being the only owner occupied unit is going to make a sale, short or otherwise, VERY difficult. Your condo building is "non-warrantable", which means most lenders will not make loans for condos in that building. You may be limited to cash buyers. Have you tried to market the condo? Any recent sales?

Are the loan(s) you have on your units strictly purchase money or refinances with no cash out? If cash was taken, was it used just for improvements? Or, did you, at some point, take cash out of the unit and use it for some other purpose? That has an impact on your taxes. There was a program to forgive the taxes on purchase/improvment loans for owner occupants. That may have expired at the end of 2011. Even with that, you can avoid the tax hit if you can show you're insolvent.

It sounds like you have a genuine hardship with your job situation. That may make the lender more willing to accept a short sale. Do you have more than one loan? If so, are they with the same lender? Two loans with two different lenders can be a pain. The second will want a little something but the first will only want to give a very little something. Realtor fees and other costs will be covered as part of the short sale. If the lender agrees to the short, you shouldn't have to pay anything. If the lender thinks you might be able to pay something, they might ask you to accept a promissory note to pay part of what you owe. They would take payments on that note. Certainly you want to avoid that if possible.

Bankruptcy may be an option. You should probably have a discussion with a bankruptcy attorney. Trouble is, many will push you toward this option even if there are better ones.

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