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Posted On: 03/12/2008

Q: When I bough my house I was trapped with negative amortization, and now my monthly mortgage payments are too high to pay. I used to complete my payments by withdrawing money from my children’s savings, but they are gone now and now I'm about to fall behind on my mortgage. I have talked to my lenders and they keep saying that they cannot help me until my payments are behind. My question is, if I cannot pay the whole monthly payment, can I send partial payments or just send nothing at all? However, if I don’t send any payment I can save that money for all expenses in case of legal actions that a short sale can carry. Anyway, in both instances my credit, which is less than perfect, will be damaged. Please advise.

A: If the lender will not modify the loan then neither partial payments nor missed payments are the solution to your situation. Your best choice is to sell. If that’s not possible you are likely looking at a short sale – if the lender will accept such an arrangement – or a foreclosure.

The minute you could not make your payments from regular income was the time to sell or refinance. This is a beast you can’t ride, and it will only get worse if you delay what needs to be done.

Get an attorney to negotiate with the lender. Speak with local real-estate brokers to get an estimated sale price. If your market has slowed, then look into making a “seller contribution” to help entice purchasers.

Q: We own a co-op apartment in a city where this form of ownership is far less common than condominiums. Why are co-ops common in some areas of the country and unusual in others? Is it unwise to purchase a co-op in cities where they are relatively rare? We find that many people seem wary of them and always have lots of questions about how the building works.

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A: Imagine you have two buildings that are exactly the same in terms of design and construction, but one is a condo and the other is a co-op. The difference between the two buildings is not how they are built but how they are owned.

With a condominium you have individual units that are privately owned, as well as common areas to which all owners have equal access.

With a co-op you have a corporation that owns the entire building, including all units. A co-op owner owns stock in the corporation and has exclusive rights to an individual unit. In effect, a co-op buyer is purchasing stock and not real estate.

What may throw off a lot of prospective buyers is the way co-op units are financed.

With a co-op you may have a general or “underlying” mortgage for the entire building. This loan is secured by all units, meaning that a unit owner cannot pay off or finance their share of this debt individually.

To buy a co-op a purchaser must pay the difference between any underlying mortgage and a unit's sale price. This can be done with cash, but so-called “share” mortgages also are available. The co-op will have a list of lenders who make loans on the property. It's important to use these lenders because they have already read and approved the co-op documents. Getting a new lender may entail a big cost for document review.

Suppose a condo unit is being sold for $500,000. You get a lender to provide a mortgage that is secured by the unit.

Alternatively, imagine that you have a co-op building with 75 units and an underlying mortgage of $7.5 million. All units secure the mortgage so the average underlying debt per unit is $100,000.

If a co-op unit in this example is sold for $500,000, the borrower will need to pay or finance the difference between the $100,000 underlying debt and the $500,000 sale price. The cost of the underlying mortgage is part of the monthly maintenance fee paid by each unit owner. The co-op mortgage is secured not by real estate but by a share in the co-op corporation and the lease rights to the unit.

Co-op financing is readily available today, something that was not true years ago. If you have an interest in a co-op then work with an experienced broker get the best deal and the best financing.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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