What is it that happens when you suddenly find yourself in a dire situation as a home owner? Your home, once thought to be the greatest investment of your life, an ever-appreciating building block to financial independence, is now valued significantly lower than what you bought it for. You owe more to the bank than what your home is now worth, and if that’s not all enough of a kick in the stomach, your once fixed loan is now adjusting. You can no longer afford the payments on your home and every day that this problem lingers, your anxiety grows and your stomach turns. It is an awful situation that many people are finding themselves in today, and there is only one way to tackle the problem: Head on.
Of course, there are always those who try to finagle their way around a problem, and though in the short term this may seem like a good solution, it will be much more damaging in the long run. One way people have tried to come out of this type of situation unscathed, is by a tactic called Buy and Bail, which is illegal and considered Mortgage Fraud. In this type of scenario, a homeowner, understanding that their home is upside down (they owe more than it’s worth) and they can’t afford the payments, will attempt to buy a new home, claiming their first home as a rental, and once they’re moved into the new place, cease payments on the old home and let it fall into foreclosure.
Some homeowners feel that their current situation is no fault of their own, but rather the real estate agent that led them to believe that home values would never fall, or the loan officer that didn’t explain the consequences of adjustable rate loans, and as a result, they don’t find anything wrong in Buying and Bailing. But not only will letting your house fall into foreclosure ruin your credit, it needs to be reiterated that buying and bailing is illegal. For two reasons: First, in most cases because there is never any intention of actually renting the house out, and in order to prove to the banks that they intend to rent it out, they falsify a rental agreement signed by a friend or relative. Second, and more importantly, it is considered mortgage fraud when a borrower withholds information, such as a deliberate intent to stop making payments on their original home. Banks are now very aware of this type of fraud and it is no longer even a feasible option, but it is important to remember that you would not be helping yourself or your situation by even considering such a tactic. There is another option, called a Short Sale.
A short sale is an agreement with the bank allowing you to sell your home for less than what you owe. At face value, this idea doesn’t help the anxiety churning in your stomach, because you’re forced to sell your home, and even worse, pay taxes on the difference of what you owe to the bank and what you sold it for. But the greatest value in doing a short sale comes in the form of saving your credit and ultimately giving you some peace of mind. Letting a home go into foreclosure is much less of a hassle than a short sale, but the end result is that your credit will be severely damaged, and your ability to qualify for a loan will be put on hold for several years. But a short sale will save your credit from the damage of a foreclosure, and as soon as you are able to, you can qualify for another loan, and find yourself back into a home, credit intact, and the upside down mortgage a distant memory.
Buy and Bail – Mortgage Fraud?
Andrew Brentan is a Team Aguilar contributor and responsible for this post.