How to Finance Vital Home Repairs When You Have No Equity

Here's a tiny bit of sunshine from the darkest corner of the U.S. housing market: Sales of homes in some stage of foreclosure or owned by banks accounted for 31% of residential sales in the second quarter -- up from 24% in the year-ago period, according to a report released Thursday by RealtyTrac.

Sales of homes in pre-foreclosure -- in default or scheduled for auction -- rose 19% from the first quarter. "This is the first time we've seen a significant jump quarter-over-quarter in short sales, so it may be the beginning of a trend," says Rick Sharga, RealtyTrac senior vice president. (In a short sale, the lender agrees to accept less than the balance due on the mortgage.)

As lenders move more properties through short sales, it reduces the backlog of distressed homes, and should eventually help stabilize home prices. "Price depreciation is a real problem for both sellers and lenders concerned about writing loans on properties that will deteriorate in value," Sharga notes.

But with continued economic malaise, there's no telling how many potential short sales and foreclosures are in the pipeline. I received an email from a homeowner named Barbara who negotiated a successful mortgage modification but may end up as a short-sale candidate because she can't finance home repairs. She has an 80/20 loan, a structure that was popular during the housing boom: It allowed people who lacked the cash for a down payment to finance 80% of the cost of their home via a standard mortgage, and then to take out a more expensive "piggyback" loan to finance the other 20%. Here's her question:

I have an 80/20 loan, and I just did a loan modification on the 80 loan, which lowered my payment from $2,008 to $1,715 a month. However, I have not been able to modify the 20 loan, and I would like to but I am not able due to my income. My home is in serious need of repairs especially in my basement where water damage could ruin my home. How can I go about refinancing to make the necessary repairs?

I'm afraid your options are limited. I spoke with a mortgage lender who said you will not be able to do a traditional refinance to pay for repairs if you have no equity in the home. The federal Home Affordable Modification Program has a program available to address second liens. But you must have received assistance through HAMP from a participating servicer and the modification on the first mortgage and second lien take place at the same time. (Some 30,000 second liens have been modified and 1,279 eliminated since the program started in April 2010.)

Depending on your age and income, you might qualify for free help from Rebuilding Together, the only national nonprofit that provides free repairs to homeowners in need. You can reach the organization at (800) 473-4229.

The most radical and difficult solution is to do a short sale of the house, provided both of your lenders agree. (The purchaser could apply for a 203k loan to finance the repairs.) You may be able to persuade the lenders if you can demonstrate that putting off the repairs will make the home uninhabitable. Call three to four different basement contractors and get their opinions and bids on your project.

If your lenders won't approve a short sale, contractors sometimes provide financing, although it may be tough for you to qualify. You can try to tap a personal loan from family or friends, or try an online peer-to-peer lending site such as Lending Club. Your finances seem much too precarious to put the repairs on a credit card (if you have one), but it's a potential last resort if procrastinating will destroy the value of your home. I hope it works out.

Struggling with your own personal finance situation? I welcome your questions but it's also about your wisdom, ideas, and experiences that may help other readers. Email me at laura.rowley@teamaol.com. You can also follow me on Twitter @MoneyHappiness.

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