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Double Trouble: What to Do If We're Underwater on Both Homes?

Dear Ali:
We are in Kentucky. In 2007, when our family expanded, we purchased a new home for $225,000. It's now worth around $190,000, and we owe $222,000 on it.
Unfortunately my income has dropped 40 percent in the past year.
However the real problem is that we are carrying our old home, which is worth $142,000 but on which we owe $147,000. We have tried without success to sell it.
Both our mortgages are 30-year-fixed rate loans with the same bank, and we would like to modify them. However, one of the criteria is that your first "primary" home mortgage payment exceed 31 percent. Does this mean I only include our current home, or can I include our old home as well?

A: Your primary home is where you're living now. When you filled out your mortgage documents, you probably made some kind of statement that it was where you intended to make your principal residence.

Your former home then takes on the status of an investment property.

Under the Making Home Affordable guidelines, you can't modify a loan on an investment property.

So if your expenses are more than 31 percent on your current home alone, you can file for a modification.

If it takes the two homes put together to get you over the 31 percent threshold, well, it is clear that you need to dump the first home, even if it means short-selling it. You mentioned that you have tried to sell it, but I don't know at what price.

At least you have the same lender; I would write that lender a "hardship letter" explaining ALL your circumstances -- what percentage of your income covers your first home, that you are looking for a way to exit your second home... and start working from there. I do not think that getting rid of your current home and moving back into the smaller one is a good long-term solution for you, and if it's possible, you should try to avoid the worst case, which is bankruptcy.

Try to take it month by month, and keep your chin up! Hopefully we will get some economic bounce that will raise your income again.

This is an aside, but another thing you need to do is to make sure that your insurance coverage is correct. You may be carrying the wrong kind of insurance on your old home -- you don't want to have something happen to it and then find out that you're not covered because you don't live there any more.

Best of luck and please keep me posted on your progress!