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Housing Values Continue Their Decline
Although the economy is starting to show signs of recovery, home values are still not where they used to be. During the heat of the recession, many homeowners were faced with a mortgage that was "upside down", they owe far more on the mortgage than their homes are worth. This is still the case for many homeowners concerned about making ongoing mortgage payments, especially those who are still in adjustable rate mortgages. These homeowners are facing not only an interest rate increase, but little chance of refinancing because of the loan to value ratio they are contending with.
It may seem like a good solution to attempt to buy a more reasonably priced home while foreclosing on your current home. Unfortunately, even if you were financially able to do this, you would not only destroy your credit, but you would risk prosecution for fraud if you lie on your application.
A homeowner who has an upside down mortgage may think this is a good alternative to refinancing, but this is simply not the case. It is important that homeowners who are considering buying a new home and allowing their current property to enter foreclosure understand the risks of doing so. Not only could this mean you lose the home you gave up to foreclosure, you may also lose the home you purchased due to the disclosures on a home loan application.
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Mortgage Loan Fraud
While we are facing a difficult home value market, there is also a foreclosure crisis and credit crisis. Even for those homeowners who have perfect credit, lenders are digging deeper into financial records to evaluate credit-worthiness. For those who already have a home, purchasing a second home is going to change the complexion of your credit report and your credit rating.
There would be a small portion of people who would qualify for a second home mortgage, and those that do would be required to put a larger amount down as the property may be considered an investment property. If you are one of the thousands of people with an upside-down mortgage, you may be asking yourself whether you should buy another house and let your current house foreclose. In order to do this you would most likely have to state that you plan to rent out your current home or your new home. However, if you are not intending to do this it could be considered fraud. Here are some things you need to be aware of:
Loan Application - The mortgage loan application (Form 1003) contains specific language that states that the homeowner is disclosing all information that may have an impact on the lender's decision to loan them money to purchase (or refinance) a home. Lenders require that the application is signed and on the bottom of the application is specific language that references Title 18, United States Code, Sec. 1001, et seq. This code covers fraudulent financial transactions. Failing to inform a lender that you plan to buy a new home and allow your current home to foreclose is considered fraud.
Qualification requirements - Lenders in today's market are aware that some homeowners feel this is a good way to get out of their home mortgage. Because of this, many have tightened their restrictions on second homes. Borrowers must qualify for the loan on the new property as well as the existing loan being counted towards their debt unless there is a signed purchase and sale agreement in place. Fannie Mae and Freddie Mac have also banned the use of rental income from an existing home to qualify for a new mortgage in most cases.
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Homeowners considering ways to get out from under an upside down mortgage may think buying a second home and abandoning the first one is a possible solution. There are serious legal implications.This could potentially lead to prosecution for fraud charges and it will certainly damage your credit.
- Form 1003 (Residential Loan Application) www.choicefunding.com/form1003.pdf
- The Mortgage Insider What are the penalties for lying on a mortgage? http://themortgageinsider.net/mortgage-answers/penalties-lying-mortgage.html
- Buy and Bail Homeowners - http://www.bloomberg.com/news/2010-08-10/-buy-and-bail-homeowners-get-past-mortgage-hurdles-from-fannie-freddie.html
- Freddie Mac Home Values Decline in Third Quarter http://www.freddiemac.com/news/archives/rates/2010/3qhpi10.html
- Fannie Mae Rules: http://fanniemae.com/kb/index?page=home&c=homebuyers_homebuyingprocess
- MortgageLoan.com Buy a New Home, Let the Current One Go to Foreclosure? http://www.mortgageloan.com/buy-new-home-let-current-one-go-foreclosure