Buying a home after short selling other home.

[FoolFromAZ]

I bought a home back in 2006 when market was at peak here in Arizona. House price went down a lot, nearly 60% down since I bought the home. Although I could still afford that home, but as I was paying high intrest on the loan and was not eligible for loan modification (due to my household income) and not able to refinance due to upside down with the home, I decided to short sell the house. This house is on my name and I am trying to short sell that home. wife is not on the title or loan.

Meanwhile I thought of buying a new homeon my wife's name and her credit as her credit is still good unlike mine. She has 40K in her 401K and I have 40K in my 401K. We are thinking of withdrawing her 401K for the downpayment so that she does not have to pay the penalty. Do you think my wife would still get the loan if we are ready to put 20% down? Will she find any issue getting the loan due to my credit?

[disneysteve]

If the loan will only be in her name, your credit shouldn't be a factor.

That said, I wouldn't cash out a 401k for anything other than a catastrophic emergency. Buying a home doesn't qualify as such in my book. Keep renting until you save up a downpayment that doesn't involve raiding your future nest egg.

[mcfroggin]

Agree. Raiding the nest egg is not a good trend to set.

[clintdavis]

I would definitely not pull from your 401K. Also, since Arizona is a Community Property State, your credit may still have to be checked. I would talk to a mortgage lender in your state just to check, and be up-front with them on the situation. It would be better to know up-front than to wait until you have paid an application fee.

Thanks for sharing!

[wincrasher]

My Sister is buying a house right now.

She is doing it alone, not using her husband's lousy credit. The downside is she can't claim his income if she doesn't claim his credit.

So your wife will have do get the mortgage solely on her credit and her income, and your name will not be on the title. You will also have to document with the underwriter where the downpayment came from - you may have to fill out a gift form - gifting the money to your wife.

I'd agree with others not to cash out your 401k. You'd pay alot in penalties and extra taxes. If your short sale goes thru and debt is forgiven, you are also looking at a potential tax hit for the "income" derived, so you need to prepare yourself for that.

Your interest rate must have been astronomical to choose this course over just sitting tight.

[riverwed070707]

My Sister is buying a house right now.

Your interest rate must have been astronomical to choose this course over just sitting tight.

This is what I was thinking as well.

You could still afford the home, you presumably still liked the home, you're certainly not upgrading because you're buying a new home on a lower income...so you did a short sale just becuase you decided after you bought the house that the interest rate was too high?! Was it really that high or was it just high in comparison to what today's rates are? If you were still enjoying the home, the value of it shouldn't matter, it only matters when you need to sell which it sounds like you didn't.

Anyway to each their own, but I think this is a prime example of the panic the housing market crash has caused and how even those not struggling have contributed to its continued downturn.

[cschin4]

I really don't understand all the credit talk, short selling, who is on the title, etc. The question is, can you afford the home or not based on your assets and liabilities? That is the only question you need to answer. The rest is mumbo jumbo that people get caught in when buying stuff they can't really afford.

[dczech09]

One thing you gotta figure out is what you 401k administrator allows for withdrawls for home ownership. Some may only allow you to withdraw up to 50% of your account balance; other will treat it as a loan and not a withdraw. If it is treated as a loan, and you lose your job, you have 60 days to pay it back in order to avoid taxes and penalty. If it is treated as a withdraw, you will stay pay taxes, but the IRS will not charge a penalty.

Either way, I would not consider taking money from a retirement account. Yes the IRS allows this withdrawl as a "hardship withdraw," which I think is stupid because home ownership should not be considered hardship. Also the opportunity cost associated with taking money from your 401k will far exceed any benefit from getting into a home.

I think you're looking through the lens the wrong way. You're viewing home ownership as a necessity. STOP IT! Home ownership is NOT a necessity by any stroke of the imagination; it is a luxury. Our society has twisted our perceptions on this and we need to got back to viewing this as a luxury. There are plenty of options to for shelter such as renting.

I am choosing to rent while saving for a house. I will not take out a mortgage; instead I will save and pay cash. Now I'm not saying that you should do the same (unless you want to), but I'm saying that you should see that saving for a simple 20% downpayment is definitely viable.

[dczech09]

*** CORRECTION ***

I did a little further digging and consulted my textbooks from when I studied to be a financial advisor. Actually there is a little confusion here; the penalty free withdraw only applies to IRA accounts and first time home purchases.

401k's allow for early withdrawl in hardship situations; the IRS does not consider home ownership a hardship. So if you do take money from the 401k, it will be treated as a loan and subject to taxes and a possible penalty if not paid back in full within 60 days of terminating employment. Again, don't do it!

[disneysteve]

I really don't understand all the credit talk, short selling, who is on the title, etc. The question is, can you afford the home or not based on your assets and liabilities? That is the only question you need to answer.

Well said.

You're viewing home ownership as a necessity. STOP IT! Home ownership is NOT a necessity by any stroke of the imagination; it is a luxury. Our society has twisted our perceptions on this and we need to got back to viewing this as a luxury.

How much better off would our society and our economy be if this were the prevailing opinion. Part of the problem is the tremendous push from our government to encourage home ownership. Lots and lots of people who have no business buying are pushed into it by government policies, like FHA loans with as little as 0% down and lax lending regulations.

[dczech09]

How much better off would our society and our economy be if this were the prevailing opinion. Part of the problem is the tremendous push from our government to encourage home ownership. Lots and lots of people who have no business buying are pushed into it by government policies, like FHA loans with as little as 0% down and lax lending regulations.

Agreed. Problem is that people do not realize that this is the problem. They see advertisements for 0% down and go "YES! I can get into a home!"

Its also pretty funny when people get into financial troubles cuz of this, that they go after the banks saying "you should have known better!" Uh no! You should have known better before buying the home and asking for the loan you had no business reaching for. Not only does government push home ownership as a necessity, they also push for corporate responsibility over personal responsibility. Of course the moment the bank says "No we cannot give you this loan," then ACORN comes in and files redlining.

[wincrasher]

I think one could see the programs that were out there both ways. Some see it as pushing people into ownership. Others see it as enabling working people to have opportunity. Home ownership and encouraging it should be a good thing - there are certainly alot of benefits to society - so the government providing a stable marketplace is an admirable goal. How many of you middle class suburban dwellers would even have been able to get a mortgage in the last 30 years, if it weren't for the existence of Fanny and Freddy? I think it fueled alot of prosperity, having affordable mortgages available to average folks.

Some would have you believe that the mortgage mess was because of these government programs like FHA with only 3% down. That is simply not the case. The vast numbers of FHA loans are not in "ACORN" areas, but in rural America. The program has a very good track record, with defaults very low.

The problem was the other products. The ARMS, the 80/20 loans, no-doc loans etc. Securitizing these products and being irresponsible with the paperwork. Allowing derivatives and all the other financial instruments to cover bets with dubious ratings. Why weren't the interest rates and PMI sufficient to cover the risks?

Our collective greed, not only the banks, but for 401k and bond returns and property appreciation, caused this feeding frenzy. Perhaps not letting the market be a free-for-all might have prevented alot of the damage.

Even with all the above said, I still believe it's best for you personally to buy only when you have sufficient reserves, plus the traditional 20% down. In fact, if I controlled the world, all people would go to college, work and save a few years, then get married, then buy their house (with 20% down), and then have their kids (preferably only one or two). But I don't and that obviously is a dinosaur's way of thinking in our modern times.

[disneysteve]

Some see it as pushing people into ownership. Others see it as enabling working people to have opportunity.

I do think home ownership is a good thing, but only for those who can actually afford it. Bending the rules to make it affordable isn't a good thing. Lowering the down payment requirement, allowing banks to offer "creative" financing and other such moves is not a good thing. Banks definitely got greedy. So did buyers. There isn't any one thing that caused the housing mess.

[wincrasher]

Just read an article on CNBC lamenting the "20% requirement" for the new rules to be "qualifying". They were saying that virtually no one will buy houses at that rate.

What they don't say is more interesting. The requirement is actually that the banks have to keep 5% ownership of the loan (non-qualifying) and can't just pass them along to someone else to take the risk. That is what they are whining about. They want buyers to have "skin in the game', but see no problem themselves not having any.

It's disgusting. They need to get out of this mindset of just being middlemen in the process. They need to hold a portion of all mortgages they write as assets, regardless of downpayment or other factors. That is a whole other game and would correct alot of the problems.

[tripods68]

FoolfromAZ - I followed you dilemma in the past. Given that it will take 3 years to improved your credit again based on your short sale that will hit your credit score, renting in AZ for the next 3 years is an option untill your credit improves....IMO.