Homeowner Over Their Head In Debt

Added January 19, 2009 by Ilyce R. Glink

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Summary: A new homeowner is feeling overwhelmed by their amount of debt. Although their debt ratio does not appear to be too high, there might be ways to keep the home. A debt counselor could help this homeowner keep stable until it's a more profitable time to sell the home.

Q: About 3 months ago, I bought a used home. But now I'm finding it difficult to meet all the expenses of owning this home.

Is it a good idea to sell now? I don't want to go deeper into other credit card debt. My debt-to-income ratio is 35 percent.

A: It's unfortunate that you had to go through the time, trouble and expense of buying a home only to discover that you can't afford to pay for it.

But let's try to figure out why you can't afford to pay for this property. If your debt-to-income ratio is truly 35 percent, including your mortgage, taxes, insurance, credit card debt, car loans, school loans and other debt, you should have enough left over from your paycheck to make your mortgage payment.

I'm guessing your true debt-to-income ratio is a lot higher, perhaps closing in on 40 to 50 percent. That would equal more than half of your take-home pay and I could see how it could be hard to make ends meet at the end of the month.

Because you'll almost certainly lose money if you sell this home now, I'd love for you to figure out a way to keep the home for at least a year or two, in order to give yourself a chance to at least walk away breaking even.

Can you get a second job in order to help meet your expenses and pay off credit card debt? Is your credit good enough to transfer the balances on your credit cards to lower or zero interest rate cards? Is there a different kind of mortgage you could get -- perhaps one that is interest-only -- that would be less expensive on a monthly basis?

Although you didn't include specifics like your credit score, annual salary and mortgage details, it is possible that you have simply overspent. If that's the case, you should spend some time with a reputable debt counselor to see if there is anything else you can do to lower the amount of cash that is going out each month. Try the folks at Consumer Credit Counseling Services (cccsinc.org) and ask for their free budget counseling.

If there isn't anything you can do to either increase your income or lower your expenses, you should definitely sell your home. While homeownership is a wonderful thing, you shouldn't take it on until you're financially stable enough to enjoy it.

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