Major milestones such as having a baby, switching to a new job, moving to a new state or selling a house require careful thought and extensive planning. Unfortunately, Ted from Raleigh, North Carolina failed to plan and now faces all of the above changes at the same time.
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Calling in to “The Ramsey Show” recently, Ted confessed that his first mistake was to buy a house he couldn’t afford two years ago. He made things worse by quitting his job recently and accepting another one in Nevada. His wife is now 38 weeks-pregnant as he struggles to sell the house in Raleigh and faces foreclosure.
Dave Ramsey is aghast and believes Ted’s decision to leave his job at this critical juncture has put his family’s financial future in jeopardy.
“You have to stay there until the baby comes and the house is sold,” said Ramsey. “And if you can’t pay the house payment because it’s so tight, you have to work an extra job. Suck it up, buttercup, and take care of your family, your wife and your baby and your obligations.”
Unfortunately, many Americans find themselves in similarly difficult situations after they stretch their budget to squeeze themselves into homes they can’t afford.
Dream homes turn into nightmares
About 82% of Americans who purchased a home in 2023 or 2024 have at least one regret, according to a study by Clever Real Estate. The most common regret is buying a home that requires too much maintenance, and 23% of those with remorse said they spent too much for the home.
Forty-three percent of recent buyers said they’ve struggled to make their mortgage payment on time, and 44% said they’ve had to take on additional debt to maintain their standard of living.
Ted is certainly part of this cohort of regretful homeowners. He paid $366,500 for a house with just 5% down and a 7% interest rate, which means more than 50% of his after-tax income goes to the mortgage. Ramsey described this purchase as “mathematical suicide.”
Taking a new job in Nevada has compelled him to put the house on the market, but the only offers he has received have been below his purchase price. Ted estimates that he would owe $30,000 to the bank if he accepted the best offer he’s received in the recent months.
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Negative equity — a situation where a property is worth less than the outstanding mortgage balance — is rare. As of the first quarter of 2024, only 1.2 million homes or 2.1% of all mortgaged properties in America were “underwater,” according to the latest CoreLogic Homeowner Equity Report.
As a forced seller on an underwater property, Ted now faces a range of unpleasant choices.
Unpleasant choices
Ramsey recommended waiting a few months to see if the property sells for a breakeven price. If, by then, the property hasn’t sold for a reasonable valuation, Ted can offer the bank a short sale or deed in lieu of foreclosure. In either case, he must convince the bank to take a haircut on the mortgage.
Ramsey estimated that if the home gets foreclosed on and the bank sells it for around $200,000 they will sue Ted for the $110,000 deficit, including foreclosure fees and back payments.
However, Ramsey failed to suggest another solution that could potentially put Ted in a better position: staying in Raleigh. By quitting the Nevada job and looking for a similar role locally, Ted can make his pregnant wife much more comfortable, avoid a forced sale on the house and wait for the market to eventually offer him a breakeven price for the property.
In fact, taking multiple jobs — as 8.2 million Americans have done, according to the monthly Current Population Survey — could help Ted manage the mortgage and save up enough money to cover the negative equity if he chooses to sell later.
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