Tough Choices For Home Owner In Debt

Added March 21, 2006 by Ilyce R. Glink

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Summary: What most folks don't understand about credit these days is that almost no one is turned down. Although your credit score may not be the highest, it may be good enough to get a line of credit or a home equity loan at a fairly decent rate. If you can refinance your mortgage and take out some of the equity that you have, you may be able to do some of the repairs and improvements you need to do to continue living there.

Q: I have lived in my house for 10 years and it needs some major repairs, including septic tank problems, possible foundation problems, and other big-ticket items.

I never did much maintenance to the house through the years due to marital problems and financial difficulties. My credit isn't the best, so I cannot get a home equity line of credit.

I'm thinking of selling, but I know I will sell the house for a loss and maybe get stuck owing cash on the mortgage. What can I do? Thank you.

A: You're in a difficult situation financially, without a lot of options. But, you may have more than you think.

First, get a copy of your credit history and credit score through www.annualcreditreport.com. You're entitled to a free copy from each of the three credit reporting bureaus. When you go there, you'll be asked if you'd like a credit score. You'll pay $6.95 for this, but it's a good value. You'll see what lenders are going to see.

Next, talk to some top-rated mortgage lenders, such as a national company, a big local bank, a local credit union, and a mortgage broker you know and trust. For the national companies, you can go to JD Power and Associates (jdpower.com) to see which companies rank highly for customer service.

These companies are well-qualified to tell you what kind of interest rate you'd qualify for and how much you'd pay for a home equity line of credit.

What most folks don't understand about credit these days is that almost no one is turned down. Although your credit score may not be the highest, it may be good enough to get a line of credit or a home equity loan at a fairly decent rate.

If you can refinance your mortgage and take out some of the equity that you have, you may be able to do some of the repairs and improvements you need to do to continue living there.

It's also possible that the house and its problems aren't worth saving and the value of your property is in the land. Talk to a local real estate agent about what's going on in your neighborhood in terms of tear-downs. Hopefully you can sell the house for at least what your mortgage balance is.

Finally, if you are going to sell and you'll be in a short-sale position (that is, the house is worth less than the mortgage balance), know that you're going to get a tax bill for the difference between what you owe and what the bank settles for, the following April 15th.

The IRS treats short sales as phantom income, and you'll be expected to pay tax on the difference between what you owed and what the bank accepted. For example, if you owe $50,000 on the property, but the house sells for $40,000, and the bank agrees to take $40,000 and close out your account, the IRS will treat the missing $10,000 as income and you will pay federal and state tax on that amount.

It sounds unfair, but that's the law. You've got some work to do here, to figure out which direction will be best for you. It won't be easy, but I know you can get through it.

Published: Mar 21, 2006

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