Here's a heads up: This happened in our office 3 times recently. Mortgage applicants owned and occupied upside down houses (upside down = owe more than the house is worth). Their intent was to buy REOs which were superior in quality and/or location to their existing homes . They would then RENT their upside down house until the market recovered, taking advantage of the give-away pricing on the REO's.
Buy low, sell high rent it out until such time as values turn around.
All three had lease agreements for their existing homes which enabled them to qualify to purchase the REOs. All three were full doc, good credit, but were declined because lenders will not lend on a purchase when someone is upside down on their existing home.
I spoke with the underwriter at the bank and she said that the only way they would even look at an approval is if the client had asset reserves equal to the negative on their existing home.
They wouldn"t have to pay down the balance, just had to show the assets. Even then it would be a stretch.
To proceed with purchasing the REO, these clients will need to do a short sale on their existing homes.
But will the short sale render them unable to qualify by having a negative impact on their credit?
Yet another example of how lenders are reacting overreacting to declining values here in California.
On a side note: Over at the leasing company a negative amortization mortgage will disqualify you to lease a car at several of our lenders. I guess being negative on one asset is all they want to swallow.
Written by Janet Guilbault, Mortgage Lending Expert Based Out of the San Francisco Bay Area.
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