I Have a Second Mortgage I Don’t Have to Pay Back Now But I’m Underwater. – Krystle

“Dear Steve,

I’m a 23 year old single woman.

I am currently paying a mortgage on a deed restricted condominium that I purchased in 2006. I bought the unit for $300,000. $100,000 was financed through a lender and $200,000 was given to me as a down payment assistance through a local low income housing project. They lend up to $250,000 and agree to keep the money on the books until the lender loan is paid off (in 30 years) then the payments would kick in on their loan for another 30 years (yikes). With everything that has happened the house is now worth maybe $150,000, so I’m extremely underwater in it.

I’ve tried getting a loan modify on the 1st loan because even on such a small loan, the payment with the association dues, is 37% of my monthly income. I’ve gotten the typical run around, they never answer their phone, responses take months, when they do answer they’ll transfer me to a fax machine, just typical loan modify heartache.

An important thing to note on the deed restriction, the income housing project that sold it to me is out of money to buy back units, so if they cannot buy it back, I have the right to sell it fair market value instead, which is what would happen if I were to put it on the market at this point.

I’ve also got two credit card payments, an American Express with a balance of $3600, I negotiated a smaller payment of $100 and lower interest rate, down to 9.99% and a visa card of $2600 with a payment of 95.00 and an interest rate of 14.3%. I accrued these through a major car engine overhaul, and carpeting for the home due to some health reasons with the previous flooring. I also take blame for some emotional spending also contributing to the balances. i’ve since shut closed the Visa card and the AMEX was closed because of the agreement we came to.

After all my other bills which are minimal essentials/utilities not counting fuel, groceries, medicines, or money to put into savings, I’ve got about $100 a week to live on. Luckily I am a single woman, and need little groceries, and I’m able to use public transport to save on fuel costs, but it seems to still a struggle each week.

At work I have a 401k that has $5500 in it that I started at age 21, two years ago and have been contributing to that with each check.

My specific questions are, what in the world should I do about the home? I haven’t ever missed a payment but I feel like those who do miss payments get more help, quicker, from their lender. Perhaps I could get more priority on a modify if I missed some payments. I have always been told to never miss a real estate payment, miss a credit card payment before you miss a real estate payment, but I don’t know how good that advice is. Should I wait it out on the house? I have no idea when it will be worth as much as I paid. More importantly, I really don’t understand what my options are with it since I have that strange second loan on it. Can you please clarify this?

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With the credit cards, the balances are going down but I’ve still got years to wait before they’re gone, I’ve considered taking a loan from my 401k for at least the smaller one but I’m hesistant because I am trying to get some schooling done in the fall so I can switch jobs, and I’m afraid if I take out that loan when I switch jobs, they’ll want the loan paid off in full. What is your recommendation? Can you explain to me what happens to my credit and the process if I just stop paying them?

I appreciate any and all help you can provide with this. I know my struggles are those of many, many others, I feel like such a complainer for even writing them down. I just want to get an action plan so I can stop worrying so much over MONEY.

Thanks for your time.


Dear Krystle,

A very interesting situation indeed.

I’m sure the group that helped you get into the home has been significantly impacted by the current economic conditions as well. They must be hating life at the moment.

My overall concern is that even without the second mortgage payment at this point it seems like you are still nearly making it month-to-month. One area you should examine is if you are typically getting a large tax refund each year. If you are then you are probably overwithholding each month and if you adjusted your withholdings to break even at the end of the tax year you’d have more money in your pocket on a monthly basis when you need it most.

I think we need to approach this situation in a roundabout way. You mention you may have to return to school to further your education. That’s potentially going to add to your debt load if you are going to take out student loans to accomplish that education.

In anticipation of the possible debt to come and the fact you are limping along right now, it seems logical to sell the unit for what you can right now and rent something for less money. You are fortunate that it seems you would be able to find a “fire sale” buyer for the unit and get out from under it without bankruptcy. That is as long as the low income housing project did not come after you for the balance due and the $150,000 – $200,000 was not treated as forgiven income which would create a huge tax liability. If it did then bankruptcy might be a real consideration to make a clean break without any tax consequences.

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Bankruptcy would also protect the money you’ve been able to save so far in your 401k and it does not prevent you from being eligible for student loans.

Based simply on the potential consequences to you of tax debt or liability for the second mortgage I think you should go meet with a local bankruptcy attorney and discuss this situation. If you want, you can click here to find a local bankruptcy attorney.

Bankruptcy might seem extreme but it just seems to me that at this point in your life you would be better off by engaging some solution that allows you to move forward without the potential for a surprise future liability that might sink all your hopes and plans.

The problem with the loan modification approach is that even if you could get a trail loan modification there is no reason to believe that it would not leave you in worse shape. See Trail Loan Modifications Trash Credit Report and Credit Score.

Leave the 401k money alone and your first stop here should be a discussion with a bankruptcy attorney.

Please update me on your progress by

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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