Rehab loan on underwater home is a dicey proposition
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 pay off some bills and improve my credit, which isn't too bad except for my student loans.
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 203(k) and straight up home improvement loans. The question for you is whether you should even undertake the renovation.
Your home is worth less than what you currently owe your lender. Will it be worth more than what you owe 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 improvements you plan to make and the home's expected 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 certain problems with your home 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. It looked dark and dreary. When the homeowner removed the tree and put in new landscaping, 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 get buyers to pay more.
A new roof, replacing hot water heaters, boilers and air-conditioning units, replacing siding and other major improvements to the home may not result in a sales price premium that covers 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 show up 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, rather than later this year.
You probably can't time the real estate market, but you can get more information to make better decision. Taking out the renovation loan will cost you money and will mean taking on more debt. That increased debt will need to get paid off when you sell. Depending on how underwater you are on your home, you need to figure out if your home is a better buy for someone looking at a home in need of repairs or a fixed up home.
If you're thinking 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.
(Ilyce R. Glink is the author of many books on real estate and host of "Real Estate Minute" on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her Web site, http://www.thinkglink.com.)