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Silent second keeps lenders away

Dr. Don TaylorDear Dr. Don,
My husband and I have about $30,000 in credit card and loan debts. Our home mortgage balance is $127,000 on a home valued at $295,000. We have a silent second on our house for $44,000 for home improvements through the City of Rialto. We cannot get an equity loan because of the silent second. The loan companies say we have to pay it off. The only way I see an out is to file bankruptcy. What do you think? Thank you for your time. -- Silent Second

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Dear Silent Second,
With a silent second, an economic development council or housing authority has arranged a mortgage loan on preferred terms. The terms of a silent second vary depending on the loan program and how long you've been in the loan. One condition of that loan is that no other credit, other than an existing first mortgage, can be put ahead of it in foreclosure proceedings. That's why you're not having any luck finding a home equity lender

One potential solution to your credit problems is to file for bankruptcy. A Chapter 13 bankruptcy sets up a court approved prepayment plan that runs over the next three to five years. Once the plan is completed, the bankruptcy court discharges any remaining eligible debts. Holding on to your house through a Chapter 13 bankruptcy, if you're current on your mortgage payments, is fairly straightforward. You should discuss this scenario with a bankruptcy attorney prior to taking this step.

Another alternative is to sell the home, capture the equity, pay off your debts and use the balance as a down payment on a new home as shown in the table below. You've avoided bankruptcy, paid off your credit card debt and have a substantial down payment for a new home.

Fair Market Value $ 295,000
First mortgage balance $ (127,000)
Silent second mortgage balance $ (44,000)
Equity $ 124,000
Equity $ 124,000
Real Estate Commission @ 6% $ (17,700)
Credit Card Debt $ (30,000)
Available for down payment
$ 76,300

I don't know enough about your income, credit history or housing prices in your area to know if this solution is better for you than filing for bankruptcy, but it is an alternative that you should consider.

Talk to your local housing authority too and confirm what funds are due if you sell the house, and the viability of keeping the loan in good standing through a Chapter 13 bankruptcy proceeding.

-- Posted: Feb. 15, 2005




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