Expert: Matt Heisler - 10/1/2008

Question
QUESTION: Hi Matt,
My wife and I have an opportunity to build a home (we were given the land by my wife's family).  The issue is, that we bought a condo about two years ago, and given the market conditions right now, I know it won't sell for what we paid for it.  However, I'm wondering if we sell it for less than what we owe, can we carry the difference into our next mortgage(just adding to the new mortgage amount).  I think this might make sense whereas we are getting the land for free, so we're already getting a great deal on our next home, putting the amount we lose on the condo, into this mortgage might be our best bet.  We're just really ready to say goodbye to condo living and want to live in a house.  Do you know if this is a viable option?

Thanks a lot,
Tim

ANSWER: Hello-

You have several options available to you.
1) You could try a short sale with the bank.  A short -sale is when the lender agrees to take less than the pay off amount.  Instead of carrying the debt, you could leave the home debt free.

2) You can definitely do what you're suggesting, just probably not the way you are suggesting.  Car dealers often "roll over your debt", but you can't do that with mortgages.  What you can do, however, is take the loss on the condo, borrow some short-term money to cover the loss (credit cards or personal loans come to mind) and then over borrow on the new home.  For example:

Condo sale:  200
Loss on condo: 20K

New Home building costs:  200K
New Home Mortgage:  220K
Over-borrow amount: 20K

You the amount you "over-borrow" to pay off the loss on the condo.  Easy. You'll just need to make sure that your overborrow amount is still consistent from your "Loan-to-value" ratios and your "debt-to-income" ratio.  You'll need to check with your mortgage broker to make sure its feasible.

Matt

---------- FOLLOW-UP ----------

QUESTION: Hi Matt - thanks so much for getting back to me so quickly, I really appreciate it.  Option 1 seems ideal, but if we had to go with Option 2, would it matter if we were using a different bank for our new home mortgage, than the one we had before? would we need to stick with the same mortgage company for our new home?

ANSWER: Hello-

No, it shouldn't matter.  But you should shop around, as the credit crisis has made rates vary wildly among banks.  If you're in MA, let me know, and I can consul you further.

It won't matter because banks issue mortgages based on the value of the ENTIRE property.  So House + Land = Collateral.  Or, to continue my example, New Home: 200K + Land 200K = 400K Collateral.  So if you borrow $220 against 400K, You still have over 40% equity in the property - which should be an easy mortgage to get.  Recognize that if the bank forecloses, they get the house AND the land - the mortgage is on the whole property.

Matt

---------- FOLLOW-UP ----------

QUESTION: Thanks Matt.  Just so i'm clear(as i'm a little confused on how to best handle the loss on the condo).  Would the amount I overborrow from the bank on the new home, get paid to my previous mortgage right away so its paid off, and then i'd just owe the overborrow amount to the bank?  Also - what do you think the best way to facilitate this would be with my current lender if we were to go ahead with it.  How have you seen this work in the past? I am based in MA. as well.
Thanks!

Answer
Hello:

I've sketched out the broad outlines of what you need to do.  The specifics on what your asking depend on:
A) Your credit rating
B) How far apart the closings are
C) How much cash you have on hand
D) How much loss/overborrow differential we're talking about.

I can't answer your specific question without actually doing your mortgage, and I'm not a mortgage person.  Since you're in MA, contact my work e-mail directly, and I'll direct you to someone who can answer:
Matthew D. Heisler
Heisler & Mattson Properties
-------------------------------------------------
508.925.4626 (o)
617.755.3190 (c)
matt_heisler@heislerandmattson.com
http://www.bjheisler.com

Again, as I noted previously, I see no advantage or additional convenience in working with the same lender - for the lender, there's no relationship between loan A and loan B.  Trying to make them related is probably going to cause you only frustration.  

Sincerely,

Matt Heisler