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When financial hardship strikes, the natural instinct is to save your home, for many reasons:

• You want to meet your obligations and fulfill your promises
• Your family lives in the home
• You want to move when it fits your life plan
• You put a lot of planning, time and money into the house
• You want to avoid the stress and embarrassment of a foreclosure

One of the ways to make the payments affordable and stay in the home is a loan modification. In an ideal loan mod the bank lowers your interest rate and lowers your payment.

If the loan modification doesn’t work, homeowners sometimes consider renting the house out. Here are advantages and disadvantages of that strategy:

Advantages:

If you can truly get into break even or positive cash flow by renting your home out, being a landlord can help you bridge the gap.

Landlording and Cashflow Disadvantages:

• You’re a landlord!
• Maintenance, roof replacements, furnace repair or replacement and other repairs can set you back. You are obligated to provide safe housing to your tenant. If you don’t have cash reserves you can get into all sorts of trouble.
• Vacancies, tenant destruction, late pays, evictions can all erode your cash reserves that you didn't have to begin with.

Significant Non-Obvious Disadvantages of Converting Your Home to a Rental

• If eventually the rental strategy doesn’t work out, you have now eliminated your eligibility for some assistance programs.
• Many foreclosure avoidance programs are constructed to help owner occupied owners and not landlords and owners of investment properties. Renting your house out makes you ineligible for some of these important programs.
• There are government and bank programs such as HAFA short sales that obligate your lender to forgive your deficiency in a short sale and hand you a $3,000 incentive check at closing. But… it doesn’t apply to rental properties.
• If you have an FHA loan, FHA will not approve a short sale for a rental property.

There Are Many Considerations - Always Seek Advice Of Real Estate Professionals

Therefore, before you try to save your house by renting it out, please consider all of the what-if scenarios. Local rental property managers and short sale Realtors can give you many insights.

Case Study in Louisville, KY:

Homeowners want to do the right thing and stay current on payments until the short sale is done.

Homeowners don’t feel right to fall behind.

Homeowners are willing to postpone a critical relocation in order to stay current and not have to pay simultaneous rent and mortgage payments.

Homeowners want to preserve their credit so they can get back into home ownership as soon as possible.

HUD says “NO! You Must Default!”

HUD Says What?

Proof?

I always go to the source document.

Here’s an excerpt from HUD Mortgagee Letter 2008-43:

PFS is HUD language for "Pre Foreclosure Sale" which is their formal phrase for "Short Sale"

Here’s another excerpt from another HUD Letter:

and it continues...

Please note that HUD warns that the borrower must not be encouraged to default (for example by the the Realtor) but three sentences later HUD not only encourages the borrower to default, they make it mandatory.

My suggestion to my clients as a Realtor:

1. Clients should contact the lender and ask the lender for instructions to default or not.
2. Clients should contact a lawyer to confirm the legality of a decision to default.
   

This is just one example of the hundreds of details and nuances that a short sale expert Realtor must know about. Always put an expert on your side.

If you need to avoid foreclosure in the Louisville Kentucky area, please call Dave Halpern at (502) 664-7827.

The lender pays the Realtor commission so you don’t have to.