Expert: Dick Dennis - 4/1/2009

Question
Hi Mr. Dennis,

While building a spec house, I sold my personal house in July of 2008 and moved into the newly finished spec home. The house purchase price was $617k, and in order to keep from having a high interest jumbo loan, I got a $417,000 conforming 1st mortgage, and was pre-qualified for a $200,000 heloc, but when I went to close on it, I was denied. They explained the timing was bad, just as bank issues with lending began happening, and credit lines tightened up with a weakening economy and the mortgage crisis. After exhausting other possible options, a family member loaned the remaining $200k by opening a heloc on his house to loan me the money until I could get financing lined up.


Nearly a year later, and with the economy in worse shape than originally thought, the value of my house is much less than I paid for it now. And now that my construction business has really slimmed out, I'm in a difficult bind. I can't keep it, because I now can't afford it. And I can't sell it, because its not worth what I owe. And I can't walk away from it, because then I'd lose my family's $200k invested (not to mention my 770 credit scores would be gone).

Any ideas, suggestions, etc? I'm sure I am not the only one in this type of situation with how the mortgage crisis has affected everyone, but I thought I'd ask.

Thanks alot for your help!

Paul

Answer
There is nothing you can do about the market, Paul, but there is something you can do about the money you owe to your family member. Before you decide to walk away from the house (although I believe you should sell it as a "short sale,") reinforce your debt to him/her by executing a personal note for the amount you owe him/her, repeating the terms and payments. Then the house can be sold short or foreclosed upon "wiping out" the heloc 2nd mortgage.

Or, you can let the family member foreclose on the property and take it over. But that may not work because then the family member would be required to make the payments on the first mortgage, unless you agree to make payments to him/her as before.

Whatever you decide to do, talk to a real estate attorney to put whatever you decide to do (at least to create the note to preserve his/her loan) into an agreement and/or note.

In this kind of market, Paul, your family member just has to realize that making a loan was not a wise thing to do. He/she, of course, is not the only one to suffer through this kind of thing.

One thing YOU just went to school for is that you will NEVER, NEVER, NEVER again buy a property with 100% financing unless you know absolutely that you will be able to pay it off within ONE YEAR. I wish you well.

Dick Dennis
dick@dickdennis.com