Financial Q&A: Credit Cards Used to Build a House Lead to Big Financial Trouble

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Q: I took my credit cards and created myself a summer job - when I am not teaching - by building a house. I am almost finished building the house with my credit cards and about to go bankrupt. The banks tell me they will not make me a loan even when I finish the house, as my credit-card debt is too high. I tried to explain to them that I wanted to pay off the credit cards, but they said it made no difference. What should I do?

T.S., Pine Bluff, Ark.

A: If Joel Doelger had the power to turn back the clock, the director of counseling at Credit Counseling of Arkansas says that he would have recommended that you use a traditional builder's spec loan to cover the initial cost of building the home. That would have allowed you to purchase supplies, but with a lower interest rate than the credit cards have charged.

Unfortunately, that's not the case. And to worsen matters, given the current soft housing market, it may be difficult to sell a completed home, much less an almost completed home.

It's a bit of a long shot, but Mr. Doelger knows of one loan product that could help both you and any potential home buyer. The FHA offers a rehab loan that allows the buyer to roll the cost of home improvements into the initial loan.

If you found a buyer who would qualify for such a loan, he or she could buy the home now - as is - and roll the completion of the home into the initial loan. That would prevent the borrower from having to turn around right away to qualify for a second mortgage to complete the home.

Second mortgages typically have higher interest rates than first mortgages. If a buyer can purchase the home in its present state, you may be able to get out of this venture now, without having to sink additional money into it to make it marketable.

If you aren't able to pay the credit-card bills with the sale of the house but are hesitant about filing for bankruptcy, you might be able to use the services of a credit counseling agency, Doelger says. You'll want what is called a debt management plan (DMP). A legitimate agency will help you determine your current financial situation and assess the suitability of a DMP, as well as other options, for helping you repay the debt. …

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