Upside Down on Your Mortgage? Buy A New House For Cheap, Then Default On the Old One!
Author: Nick
Category: Money
Topics: lending, real estate
The current housing/mortgage/credit/energy/everything crisis is inspiring people to find creative solutions to overcoming their financial problems. The latest get unpoor quick scheme: swapping houses with negative equity for much cheaper ones. Even folks who are $100k or more underwater on their current mortgages can escape their crushing debt and still come out as homeowners. It’s so easy, even you can do it by following these simple steps:
- Sign a contract on a new house for cheap.
- Forge a rental agreement for your current house and use the “rental income” to help you get a mortgage for the new house.
- Move in to the new, reasonably-priced house.
- Default on the old mortgage and let the bank foreclose.
Some banks and government agencies are calling this “buy and bail” tactic fraud, usually pointing to step two which requires you to put your current house down as rental income. But since many mortgage lenders let you buy a new home before you sell the old one without a rental agreement in place (just the motivation to sell quickly so you’re not paying two mortgages), you may be able to bypass the fraud part of the scheme entirely. Those who’ve pulled it off successfully say there’s nothing fraudulent about it, possibly because it uses the banks’ own policies against them.
Because buy-and-bail is happening more and more frequently, government-sponsored underwriters like Fannie Mae are moving quickly to help clamp down on the practice. And even without new rules and regulations, buy-and-bail is still a tricky endeavor with plenty of drawbacks, such as:
- Your credit will suffer greatly. Since foreclosures latch themselves to your credit report for seven years, you really better like that new house because you won’t be getting another mortgage loan for a good long time.
- You might go to jail or get sued. If your old lender finds out that you drew up a fraudulent rental agreement to get the new mortgage, they might come after you with their army of lawyers. Even if you don’t use the fake rental agreement, jilted lenders may still come after your assets including your new home.
- It’s morally wrong. Forget rules and laws and everything else. If you pull off a buy-and-bail, you’ll be just as sleazy as the bank that sold you a mortgage you couldn’t afford in the first place.
- Banks can just say no. If a lender suspects something like a buy-and-bail situation, they might turn your down. But if you’re going for a mortgage with someone other than your current lender, there’s really no reason for the new lender to say no even if they suspect buy-and-bail since only the old lender will have to deal with the resulting foreclosure.
A few banks have wised up to the buy-and-bail scheme and are now requiring people who buy a new home before selling the old to prove they can pay the mortgage on both of them. Of course, even if you can pay both mortgages doesn’t mean you’re going to.
Personally, if you’re that far under on your current mortgage and you want to sell, I think your first attempt should be at making a short sale—selling the house for less than the balance of your mortgage—with your lender’s blessing. You get to avoid any legal tangles, the bank doesn’t lose as much money as it would on a foreclosure, and the house goes to a real person instead of a bank. Of course, if your bank won’t help you out with a short sale, you may be slightly more morally justified in buying and bailing on them.
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16 Responses »
1.
Mrs. Micah
June 12th, 2008 at 2:45 pm
Morals - psh, jail - psh. It’s your god-given right to own a house.
(I prefer Mr. Stickman’s approach!)
2.
rocketc
June 12th, 2008 at 9:54 pm
I might actually have to do this soon.
3.
Las Vegas Real Estate Guy
June 12th, 2008 at 10:34 pm
The Wall Street Journal just had an article about this. Can’t believe this kind of stuff is still going on.
4.
Kyle
June 13th, 2008 at 1:40 pm
That’s actually a REALLY good idea.
5.
Mrs.ThePoint
June 13th, 2008 at 6:55 pm
I couldn’t agree more, this is really a GOOD ideal.
I hope I would never need to use this technique, but who ever used it should get some credit for it.
They are smart.
6.
A1 Medical Supplies
June 16th, 2008 at 3:45 pm
I think your right that if you are behind on your mortgage you should try to sell your home. It is a hard market to sell in now, but if the price is right…
I have never really understood why people that know they are not going to be able to afford the mortgage in a few months don’t sell their property. Rarely is it the case that you all of a sudden go into foreclosure. Usually you know long before the bank does that you are not going to be able to pay off the house.
7.
James
June 16th, 2008 at 4:19 pm
i guess it boils down to the person himself. although it could be a way to get out of debt, but the risks involved could stop some people from doing it. personally…. if for instance my back is up against the wall… i’d go for the short sale first, then if all else fails… who knows..
8.
Maria @ Frugal Homesteading
June 17th, 2008 at 6:35 am
Some people are doing this who never intended too–they bought the new house with their first one under contract for sale or rent, and then their contract fell through after purchasing the second house.
Others assumed the geat real estate market would last forever, and now can’t sell and with everything rising in cost, can’t juggle both sets of payments.
Those who did it intentionally are another category altogether.
9.
Mortgage Brokers
June 25th, 2008 at 9:18 am
Wow we dont have this problem over here in the UK yet, but the market is wobbling with prices down 6% this year. Lots of banks already puting rates up.
10.
Mike at Gas Credit Cards
July 6th, 2008 at 4:21 am
What’s even more crazy is there is a judge in California that forgave the debt on a foreclosed home (in favor of the home owners) because they lied on their mortgage application. The judge said the lie was so outrageous the bank should have caught it… so he blamed the bank and ruled in favor of the home owners haha.
11.
Tom
July 7th, 2008 at 1:41 pm
I am in this position but want to avoid anything illegal. What if I just buy a new home and default on the other one? Avoiding the whole renting issue?
12.
mortgage center
July 10th, 2008 at 5:16 pm
This idea hasnt been publisised in the uk yet or used as far as i know, probably because it is nuts and would seriously affect your credit and future finances, probably best of sitting tight if possible and ride out the storm.
13.
Smart Equity
July 11th, 2008 at 4:12 am
All the diagrams were really informative and as well as educative.Keep up this good work.
14.
Laura
August 6th, 2008 at 6:36 pm
My husband and I bought a modest 2 bedroom home in 2/2004. We had the unexpected news a month later that we were expecting our first child. We planned the second child, born in 2007. Now we are expecting twins. Our house is too small, we need to move for business reasons (husband’s job) and our income has been depleted because I am staying home now. In addition, we are upside-down to the tune of abot 20 grand. When I called a realtor to list the home he laughed at me. There are four public auctions in our neighborhood and too many to count in our community. I can’t go back to work because my industry has removed many positions in the area in which we live and I am unable to renew my lisence due to health reasons. In addition, that great rate we have adjusts in 2011. If anyone has a suggestion as to how to get out of my home in a legal, moral way, move to a better community with better schools for my children–anything short of jumping off a bridge–I would love to hear it.
15.
Denise P
August 14th, 2008 at 2:56 pm
Laura: Best that you file for bankruptcy, foreclose on your home and save every penny from unpaid mtge payments. Find a v. modest way to rent a home in a good area for as LITTLE AS POSSIBLE (even a apartment) for right now. Work like crazy to get your credit score up again, keep saving hard, then buy again in a few years - something you can comfortably afford and preferably with the seller who has equity helping you with the financing through your Realtor or an real estate attorney. Real estate attorneys know a lot about the different tricks on how to get into home ownership. I have done all of the above - failed and succeeded, so I know how you feel.
16.
davejavu
August 18th, 2008 at 10:22 pm
I would have never thought to try anything like this, but our realtor basically lied to us when we bought our house. Four years ago, we purchased a house in an area with polluted groundwater. After buying the house, the water came back from the EPA contaminated, immediately lowering the value of our house. Now, in 2008, with the plume shifting right to our well again and prices in town dropping through the floor, we’re in deep. We owe 134K and the house, if appraised today, would probably fetch 110K at the highest. I’m sick, I’m pissed and I see no other option than to walk. It’s either drink poison or destroy our credit. And I’m not too proud to walk. I’ve petitioned the city to put in their water system to no avail, I’ve written anyone and everyone and I’m at the point when I get my next water test in two weeks, I’m going to go to an attorney to get some advice on what to do. I have a feeling he’ll encourage me to file BK. Any other suggestions before I make that leap?
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