Mortgage Advice Needed
Question: I need some advice.
10 years ago I purchased a single family house (8% FHA, $115,000). Shortly after I purchased, the bottom fell out of the real-estate market. Today, houses similar to mine are selling in the neighborhood for $85,000. I still owe ~$110k on my mortgage.
None of this would normally be a problem, except now I find out my wife is due with our 4th child. I simply do not have room in my house. So, I need to move.
My problem is this: Right now, I have $15k in the bank. After looking around, I was able to find a nice house in a nice area which is listed at $165,000.
I spoke with a mortgage broker, who basically says that based upon my wife and my salaries we qualify without any problems for this house (we make $60k between us, and other than my wife’s car loan at $250/mo. we have no other bills (except the kids 
) He’s talking a 5% down, no points, no closing costs loan at 7.5% APR 30 year fixed, which sounds a little high compared to what I’ve heard but that’s okay given the closing costs are waived.
I have impeccible credit. No blemishes, nothing late, the two credit cards I have are paid in full each month. I paid my last car loan off early to save on interest.
However, there is no possible way for me to get out of the current house I am in. I can’t sell, because if I do I will have to come up with $30k — or, if I use the $15k I have now, another $15k, but then I have nothing to put as a down payment on another house. Coming up with another $30k will take me 3-4 years of solid saving, but I don’t have 3-4 years.
An option I discussed was the possibility of renting my current house. With mortgage, taxes, and insurance, my monthly payment on my current house is ~$1200. Rentals in the area go for $700-800/mo., but according to the lender they can only count 75% of that given as a “vacancy factor”. This effectively leaves me “short” $600/mo., which, when you add it to my “new” mortgage, throws my debt-ratio through the ceiling at 45%. So, the lender sez, can’t go that route, I have to sell. But I can’t sell, for the reasons given above… But, I have to move, otherwise I have to stack the kids like cordwood….
Anyway, I was wondering if anyone else out there has run into a similar problem, and if so, how did you work around it? Any recommendations on courses of action would be greatly appreciated.
Answer: It appears that you have explored the option of renting the house which may be your best option. Your mortgage broker is correct about the 75% factor leaving your ratio too high for conventional(ie conforming )loans. However, as a mortgage broker we do loans every day at ratios well above 50%. These loans bear an interest rate higher than conforming loans but allow the transaction to go forward with the plan of refinancing when circumstance improve. Ask your broker if he does “stated income” loans or subprime (b & c) loans. With good credit history you shouldn’t have a problem. If he can’t help you e-mail me and I will give you some names in your area that can. How about adding on to your current house? Just as an example, maybe you could put a $30K bedroom addition on your house, put down $15K and borrow $15K to finance it. That may be the wisest choice, as it would add the least amount to your debt. All the other alternatives I can think or have read about on this thread would just put you deeper into the hole, IMO. Also, I think it would cost you more than $30K to get out of your current house, as there would be selling costs (which you would avoid by doing an addition), even if you sell it without an agent, which may be too hard to do if your market is still depressed.
Btw, I came up with the $30K as just a guess, so I don’t know if it’s really feasible at that price. I do know that a few years ago my neighbor added a bedroom with a small bath and kitchenette to his house for that (it was for his parents). Nothing luxurious, but certainly serviceable. It was a pretty significant addition, with foundation, roofing, HVAC, etc.
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