Settle first property before acquiring a second

Dear Ms. Mortgage Maven,I work for the federal government. My wife and I bought our first house at the height of the market. We paid about $500,000 for the property and financed 100% of the purchase price.

Three months ago, after the birth of our first child, we bought another house for $600,000 that better accommodated our family. (My wife also stopped working at that time.) We put no money down on that house as well and got 100% financing. We are renting out the first house for $3,000/month with a rent-to-own agreement with the tenant.

The tenant makes $50,000/year, has a 600 credit score and has other people living with him to help pay the rent. Currently, it is rented for $700/month more than comparable houses in the neighborhood. However, the rent we receive is not enough to cover the mortgage payment each month (we are short by another $700/month). We would like to sell the property to him now, even if it means we have to come with cash to the table (but we do not know where we would get the money from). The house is currently worth about $50,000 less than what we paid for it. We do not know where we would get the extra money to bring to the table to sell the house.

We are in a real jam. We want to unload the house because we have to pay about $700 each month to carry it but to unload we have to come up with $50,000. What should we do?

Thanks for your advice.

Abel N.

Dear Abel,

You are in a no-win situation. And so is your tenant. Essentially, you cannot afford to sell (you do not have the $50,000 needed to bring to the table), and he cannot afford to buy the property, for which he is overpaying each month in rent on the assumption that he will someday own it.

Since you do not have the $50,000 necessary to come to the table if you sold it today, the good news is that your tenant has little if any chance of qualifying for a loan. His salary does not support $450,000 worth of purchasing power. With no money down and a 600 credit score, he would have much better luck trying to buy a $200,000 property, not a $450,000 property. Some loan products will allow for boarder income to be used to qualify for the loan. However, generally speaking, the boarder has to have twelve months of cancelled checks to prove that s/he is living with the borrower and has contributed to the living expenses for an entire year, and demonstrate that the living arrangement will continue. Even then, the lender will only count 70% of the boarder's payment. For example, if the boarder paid $500/month in rent, the tenant/borrower would only get credit for $350 towards his income on his application.

The ironic thing is that you are probably lucky because it is highly unlikely your tenant will qualify to buy this property this year, so you will not be forced to come up with the $50,000 needed to sell it. You will therefore continue to collect $700 more in rent each month for this property than it is actually worth. Hopefully, the market will improve before your tenant moves out and you can sell the property close to your purchase price.

A word of caution: considering what your debt-to-income ratios must be, you probably used stated income loans to buy one or both of your properties. Unless you are certain that you have thirty-year fixed loans, I suggest that you read your loan documentation carefully to see if you have adjustable rate mortgages and if so, when those payments will adjust. I do not want to scare you further, but your situation is bad and may get worse. Since I have no great advice on how you can get out of this jam now, my only hope is to make sure you are knowledgeable about your debt so you do not suddenly find yourself in an even worse situation one day.

I strongly suggest that you look at your loan papers and get the help of a financial planner now, so that you can deal with this serious issue.

Best of luck - and do not buy any more property until you have this problem completely resolved! (Not the words you usually hear from a mortgage lender.) Sincerely,

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage lender for a national bank in Fort Washington, MD. Call her with your questions 202-607-4449 or email her at Jessica@msmortgagemaven.com and you may get your question answered in this column. You can also apply online at www.msmortgagemaven.com.