Second Home Loan Modification Is Denied By Lender

Q: We have a first mortgage of approximately $160,000 and a second mortgage that is about $25,000. The monthly payment on the first mortgage is $1,450 and $360 per month for the second.

Due to a job loss, my wife and I could not pay the first mortgage payment. We relocated from North Carolina to another state for a new job and rented out the house. We submitted paperwork for a loan modification because the amount of monthly rent that was paid to us wasn’t enough to cover both mortgages and we didn’t make enough to cover the difference.

However, the first lender told us that since we moved, the house was no longer considered our primary residence. They would not negotiate nor take any partial payments. Their attitude was all or nothing. We gave them nothing and the primary foreclosed about the middle of September.

Because of the foreclosure, the tenants moved out. Now the second lender is coming after us for their part of the money.

We cannot afford to pay on a house that we are no longer living in. Shouldn’t the second lender get money when the first lender sells the house? Why are they coming after us? Is there anything that we can do to settle with the second lender?

Our credit scores are already in the toilet so I’m not worried about my credit. I want to know what types of legal problems this situation can cause. Should I seek an attorney? Is bankruptcy a better option? All of our other bills are up to date but this one.

A: First, to qualify for a loan modification, the property in question needs to be a primary residence. When you moved to North Carolina to get another job, you forfeited the opportunity to get a loan modification on your former residence under those loan modification plans that require you to live in the home as a primary residence.

Once the first lender foreclosed on the home, the foreclosure may have wiped out the loan your second lender had given you. In that foreclosure, there probably was no money for the second lender.

Now your second lender wants to be paid and must think you have some assets available to pay off what you owe – or they wouldn’t be spending money chasing you. You should consult with a good real estate attorney who can review your documentation and help you figure out what might work with the second lender.

At this point, your credit is in the toilet. So, there’s no need to worry about that while you negotiate with the second lender. But it would be nice to have all the bad news hit your credit score now, so you can move forward and improve it over the next few years.

One way to do that is to declare bankruptcy. If you file for bankruptcy, the second loan will likely be discharged. Again, consult with a real estate attorney to explore your legal options.

It’s also possible, that the second lender has sent your debt to collections and they are trying to get what they can from you. They’re entitled to get money from the debt you owe the second lender, but if you can’t afford to make a payment to them, the second lender will have to decide whether to write the debt off or continue to pursue you.