Foreclosure And Second Mortgages

If you’re a homeowner who needed some extra money, you may have taken a second mortgage on your home . Lenders are usually willing to grant a second mortgage to homeowners who have sufficient equity in their properties (as the loan will be secured against your home) and it won’t affect any of the terms originally agreed for the primary mortgage. This option is often favoured over refinancing the primary mortgage as you can often get better interest rates, meaning it’s a cheaper alternative in the long run.

Second mortgages are often taken out when a person wants to make improvements to their home but doesn’t have the necessary available funds to do so. They are also an option when money is needed for other areas of your life such as medical costs or education fees.

How Does Foreclosure Affect Your Second Mortgage?

• In the event that you do not meet the repayments on your first mortgage, the lender may choose to file for a foreclosure if they see no other alternative. In this scenario your home will ultimately be sold off at an auction and then the funds raised will be distributed accordingly. Firstly, any real estate taxes which are owed must be paid off. Then if there is any funds left at this point they will be used to pay off the remaining balance of the primary mortgage. The second mortgage lender, also known as the junior lender, is last in line to receive his cut of the sale if indeed anything is left. Even if the second mortgage lender actually files for the foreclosure, they are usually still last in line  for their money.
• So, what happens in the event that the proceeds from the auction aren’t enough to pay off the second mortgage lender? Well there are several things which can happen, but this will largely depend on where you live as laws vary from state to state.
• They could technically sue you for the balance you still owe them and in the event that they win, they will be granted a “deficiency judgement” by the courts (this is not allowed in all states) which gives them the right to make deductions from your wages or take control of your bank accounts to settle the outstanding balance. The likelihood of this really depends on how big the outstanding balance is – if it’s relatively insignificant they may just write it off as the legal costs involved will outweigh the amount you owe.
• The second mortgage lender may also pay off the balance owed to the primary mortgage lender and bid on the property at the foreclosure auction in an attempt to recover their money.
• In the event that the proceeds of the foreclosure auction covers a portion of the outstanding balance on the second mortgage, the junior lender may issue what’s known as a “charge-off” which means they acknowledge the fact they can’t recover the debt from your personally, although in a legal sense it’s still owed to them. So they don’t simply write it off and if they wanted to at a later date they could employ a third party debt collector who would legally be permitted to actively try and recover the outstanding balance from you.

Only take out a second mortgage if you situation really warrants it and you are certain you can meet the monthly repayments of both mortgages as if you find you can’t, a secondary mortgage could give you an extremely prolonged financial headache.

Comments are closed.