Owing More Than House Is Worth – Should I Get A Renovation Loan?

shutterstock_106420625Owing more than your house is worth? When deciding if you should get a renovation loan, think about if the debt you’ll owe is worth it.

By: Ilyce Glink and Samuel Tamkin

Q: My home is like most in our neighborhood: I owe more than what it’s worth. I would continue to live in my home until I’m ready to sell, maybe around fall or near the end of this year, which would give me time to payoff some bills and improve my credit which isn’t too bad except for my student loans.

I found a mortgage company offering 203(k) and renovation loans for home upgrades, which my home needs. What should I do?

A: We omitted the name of the mortgage company you mentioned, as we don’t recommend specific lenders. But we will tell you that there are plenty of lenders out there and many of them offer an FHA 203(k) loan and straight up home improvement loans. The real question for you is whether you should even undertake the renovation.

While your home is worth less than what you currently owe your lender, will your home be worth more than what you owe your lender after your renovation costs? If the answer is that your home won’t be worth more whether or not you make these renovations, when you sell the home you will still owe more to your lender than what the home is worth.

While we have heard (and continue to hear) that the real estate market is rebounding, you still have to look at the numbers for your area and see where things currently stand. If you purchased your home in 2007 and its value went down 40 percent, a 10 or 15 increase from the bottom still leaves you long way from getting back to your purchase price.

You need to assess the current value of your home, the cost of the home improvements you plan to make and the home’s value after you make the improvements. You might be surprised to know that most home improvements do not result in a dollar for dollar increase in a home’s value. We would say that if you have certain issues with your home that are causing the home’s value to appear lower than it should, then those improvements might be worthwhile.

A good example of a home improvement project was a home with a large overgrown tree in the front yard, hiding the home from the street. The home looked dark and dreary. When the homeowner removed the tree and placed new landscaping at the home, the home had a totally different character and could (and would) sell for far more than before. If your rooms are painted in a dark color, repainting them a neutral or lighter color might go a long way to getting more buyers to pay more for a home.

Placing a new roof, replacing hot water heaters, boilers and air-conditioning units, replacing siding and other major home improvements to the home may not result in a sales price much to cover the costs you put into the home. And, if you plan to put in a new kitchen or bathroom, recent surveys can tell you what percentage of those investments will result in an increased sales price. Some investments come close to a dollar for dollar return, but most do not.

It sounds as though you have good credit and some student loans and you want to keep your good credit. In light of your situation, you might want to talk to some real estate agents in your area and gauge their thoughts on your home, what improvements they recommend you make, what you might expect in terms of financial results from those improvements and whether you might be better off selling now as the market is improving than later this year.

You probably can’t time the real estate market, but you can get more information to make a better decision. Taking out the renovation loan will cost you money. Depending on how underwater you are on your home, you need to know if your home is a better buy for someone looking at a home in need of repairs or a fixed up home. Fixing up your home means taking on more debt. That increased debt will need to get paid off when you sell.

If you’re talking about selling your home in a short sale, where you work with the lender to allow the sale of your home and forgive a part of the loan owed, you need to know that a short sale will have a negative effect on your credit history. If you are going to have a short sale now or later, you might want to have it earlier so you can get started rebuilding your credit.

You need to know that this year any forgiven debt on your primary residence will not count as income by the IRS. The law allowing you to exclude from income any forgiven debt was extended through the end of this year and we don’t know if it will be extended again.


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About Ilyce Glink

Author of 13 books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Writer of the nationally syndicated column, “Real Estate Matters.” Top-rated radio host in Atlanta. Writer for CBS MoneyWatch.com. Managing editor of the Equifax Personal Finance Blog.
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