Second Mortgages and Negative Home Equity

Whether you took out a second mortgage or lien on your home or purchased a rental property that you are struggling to afford, you may find yourself in a situation where your debt is greater than your property is currently worth. This is called having “negative equity.”

While the law does not grant us the ability to reduce the amount owed on the first mortgage of your primary residence (only second/third mortgage(s) and lien(s)), we can reduce what you owe on a second mortgage or rental property if certain criteria are met.  

On this page, we will discuss:

• Why refinancing and strategic default may not work for a second mortgage
• Why a Chapter 13 Bankruptcy may be your best option
• How to legally remove a second mortgage
• Reducing a rental property mortgage
• Avoiding home foreclosure due to a second mortgage
• Surrendering your home to reduce debt obligations

Refinancing and Strategic Mortgage Default

Refinancing

If you are currently in the process or have investigated refinancing your second mortgage or home equity loan, you may likely find that you cannot receive bank financing because of the appraised value of your home.  This is especially true if you end up owing more than what your second property is worth.  Or, based on tightened mortgage loan standards, you no longer qualify for the additional debt based on your budget and income.  This can be frustrating and causes many homeowners to feel “trapped” in their homes.

Strategic Mortgage Default

A strategic default is the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments. For homeowners, strategic defaults are done in situations where a homeowner is:

• Trying to force the mortgage company into a modification
• May not want the home due to a valuation issue (home is worth less than what they owe on it), but is trying to figure out the best way to step away from the property.  Many homeowners no longer wish to pay on a home that is worth less than what they owe, but also don’t want to damage their credit or have a potential judgment(s) from the mortgage company(s) if they decide to stop making the payments.

Many mortgage companies have directly told the homeowner that they must be 3 to 4 months behind on your mortgage before they will consider some type of modification. Once this occurs, you may risk losing your second mortgage or rental property to foreclosure. 

A Chapter 13 Bankruptcy is Your Best Option

A Chapter 13 Bankruptcy is a court-structured repayment plan that spans a 36 – 60 month time frame. It is designed to provide you with legal protection from your creditors as you reorganize your debt obligations. The purpose of the program is to provide you with reasonable repayment terms to pay off as much of your debt as you can during the payment plan. At the completion of the program, any remaining balances on unsecured debts (including your second mortgage or home equity loan) are legally eliminated or discharged allowing you to make a fresh financial start. 

Legally Remove a Second Mortgage

Rebalance home value to current market conditions

If you qualify based on home valuation factors, we can legally remove your second mortgage or home equity loan as a secured lien against your property through the Chapter 13 process.   The secondary lien isconverted to an unsecured debt obligation through the process of “lien stripping”.  You are simply required to make your best efforts to pay back the debt over a 36 – 60 month time period. Whatever is not paid will be legally eliminated through a court discharge.  At the end of the program, you will only have the primary mortgage.  This will reduce the mortgage load on your home.

You still have the option to pursue a loan modification on your primary mortgage to seek a further reduction in monthly payments. With a balanced budget and improved credit, you may be in a better position to qualify for the modification. 

If you own a rental property(s), we can reduce the total mortgage obligation (including primary mortgage) to the current market value. Using your tenant’s monthly rent payments you will own the property free and clear at the completion of the 3 – 5 year repayment plan.

Improve debt-to-income ratio

One of the main factors of credit is your debt-to-income ratio or leverage.  This measures how much available income you have to pay down your debts vs. paying your monthly living expenses.  Since the Chapter 13 establishes repayments terms at 0% interest for your unsecured debts, including the “stripped” 2nd mortgage or home equity loan, your payments are applied straight to the principal debt each month.  This plan works to reduce your debt-to-income ratio each month through the plan.

At the end of the 36 – 60 months, all remaining balances of unsecured debts, including the stripped second mortgage or home equity loan, are eliminated.  This will also improve your debt-to-income ratio and your credit and allow you the opportunity to obtain new credit that you may not have previously qualified for.

Achieve debt free existence in regards to unsecured debts, including your second mortgage or home equity loan, within 36 – 60 months.

Since the Chapter 13 program legally eliminates remaining balances from unsecured debts at the completion of the program, you can look forward to freedom from your second mortgage, home equity loan, credit card bills, medical bills, etc.

Reduce a Rental Property Mortgage

In order to take advantage of reducing the rental property mortgage, a couple of factors must be present:

• The entire value (again, current market conditions) of the property must paid to the creditor over the duration of the 3 -5 year repayment plan.
  • Example:  A client owes $75,000 on a home in Detroit that is currently worth only $10,000.  The $10,000 would be paid over 60 months or $166 per month plus interest at a reasonable rate to be determined by the Court.  At the end of the 60 month plan, the mortgage company would be required to release their mortgage and the home would be owned free and clear.  We can help you determine the market value of the home.
    
    

• Interest is paid on the reduced note during the plan.  The rate is based on prime lending rates plus a nominal risk factor.  Currently, our clients are paying 5.25% interest.
  
  

• The rental property must be generating enough income (i.e., rent payments from tenant) to exceed the expenses associated with the property:
  • Modified mortgage payment ($166.00 in above example)
  • Property taxes
  • Homeowners Insurance
  • Maintenance

Avoid Foreclosure Due to a Second Mortgage

If you are facing a home foreclosure, a contributing factor may have been a secondary mortgage or home equity loan.  When the housing market was appreciating, many homeowners took advantage of a home equity line of credit to make improvements to their home or pay down other bills.  Or maybe a second mortgage or an 80/20 home loan was necessary in order to make the initial home purchase viable based on the financing options.  In any event, many homeowners no longer have enough equity in their homes to satisfy both a primary and secondary mortgage home loan.

• Through the use of a Chapter 13 reorganization, we can legally stop the home foreclosure before the sale occurs.  You are guaranteed court protection from the foreclosure, your mortgage company and your other creditors.
• The Chapter 13 makes it possible to legally remove a second mortgage and/or home equity loan, therefore reducing your overall monthly mortgage obligation.  This process is called “lien stripping”.
• Similarly, we will most likely reduce your monthly budget outlay by consolidating and reducing your unsecured debts, such as credit card bills, medical bills, personal loans, prior loan deficiencies, judgments, etc.
• By focusing on debt reduction throughout the course of the program, your debt-to-income ratio will improve. This factor, along with the plan’s timely payments to your creditors, will bolster your credit score. These two factors along influence 65% of your credit score according to FICO.

Surrender Your Home and Eliminate Resulting Debt Obligation

If you are no longer in the position to maintain payments on your home, even after reducing your mortgage and other debts, you are able to surrender your property back to the bank through the process of filing a Chapter 7 or Chapter 13 Bankruptcy.

A bankruptcy filing will ensure that all debts are legally eliminated or discharged so that you do not receive a loan deficiency judgment in the future.

If you qualify to file a Chapter 7 Bankruptcy you will totally eliminate any unsecured debt obligations including any liabilities with the home you are surrendering.

Reduce Your Debt. Simplify Your Life.

The plan is tailored to your individual situation and budget. From the outset we will perform a detailed accounting of your debts and monthly income. We create a consolidated monthly payment that takes the frustration and guesswork out of bill paying. You no longer need to worry if your bills are being paid on time or if you are forgetting to pay one.

At the end of the program, you are left with a mortgage debt that is in line with your home value, freedom from unsecured debts and improved credit!  Call today at 866-261-8282 for a free consultation with one of our qualified Chapter 13 bankruptcy attorneys about your options for mortgage and debt reduction.

We offer free in-office or phone consultations to review your personal circumstances, analyze your situation and advise you on the best course of action. We specialize in bankruptcy law, debt resolution, foreclosure prevention and credit repair. We have offices in Detroit, Southfield, Dearborn, Flint, Ann Arbor, Lansing and Warren, Michigan. Please call us toll free at 866-261-8282 or click here to schedule a consultation right now.