First, Let’s Define a Second Mortgage
A second mortgage is a lien on your home. Just as the first mortgage holds a lien, a second mortgagor will do the same. Often, buyers will take out two mortgages simultaneously to purchase real estate. A second mortgage is a loan just like your first mortgage. They essential work the same, however, they hold different positions, hence the names first and second mortgages.
When you “take out” a mortgage on your home, it is a two-part process. You sign a promissory note which is your promise agreement to pay the lender back the money you are borrowing. You sign a mortgage or trust deed document in which your lender will record with your local recorder’s office. This mortgage or trust deed document is now a matter of public record; therefore, it is in a first or second position lien on your property.
The mortgage or trust deed agreement is the document that will allow a lender to foreclose on your property if you fail to make your payments or comply with the terms laid out within the document.
In most cases, buyers use one mortgage to purchase their home, however, there are many who will take out a second mortgage as well so they can purchase the home they so desire. In other instances, some homeowners will decide to take out a second mortgage later as they have built up equity in their home. Equity is considered the value of your home less the money you owe on your home. In essence, it is considered the portion of the value of your home that you own outright.
There are Varied Types of Second Mortgages
The term second mortgage is often used interchangeably, however, it is important to differentiate, especially when it comes to foreclosure processes. Let’s take a look at the different types of second mortgages here so you have a better understanding what will happen if you fall behind on payments.
HELOCs or Home Equity Line
When referring to HELOCs, they are often called Home Equity Lines of Credit or Home Equity Loans.
HELOC: A heloc loan is in a way like a credit card. It is a revolving line of credit. When you take out a HELOC on your home it is based on the equity you have in the home. The maximum amount allowed for use will be the base amount of your loan. You will sign a promissory note for the maximum dollar amount and the mortgage recorded will be in the same dollar amount. You do not have to borrow all of the money allotted for the HELOC. You can borrow some of the money, pay it back, and continue to borrow up to your maximum allowed debt; hence, the term revolving line of credit. There are terms with these types of loans including draw periods. When your draw period comes to due date, you will have to pay back the amount that you currently owe.
Home Equity Loan: A home equity line is much like a first mortgage. The lender will lend you up to a certain dollar amount, typically determined by the equity you have in your home, and you will pay monthly payments based on that borrowed amount. Typically, this style of second mortgage is less common than a traditional HELOC as discussed above.
First Mortgage Lenders Have First Priority
As discussed previously, when you have more than one mortgage, your first mortgage holder will have seniority over the second mortgage holder when the case of a foreclosure arises. When you take out your first mortgage, it will be recorded prior to any second mortgages you may take out in the future. A second mortgage is considered a junior lien to the first.
If a foreclosure occurs, the first mortgage lien holder will receive any proceeds before a junior lien holder will. A second mortgage lien holder does not have the same advantages as the first. In the case of a foreclosure, if a junior lien holder wants to move forward, that holder would need to pay off the balance on the first mortgage and then they could pursue the borrower under their own foreclosure proceedings.
In essence, a second mortgage holder will typically only foreclose if a property has a great deal of equity. Otherwise their costs to process a foreclosure will outweigh their financial awards after the proceedings.
What Determines if a Second Mortgage Lender Will Foreclose?
If your home has a considerable amount of equity, the second mortgage lender may foreclose. The second lender closely examines the equity within the home. For example, if the first mortgage is paid in full, there may be enough equity for the second lender to collect on the debt that is owed.
However, in a lot of cases, borrowers who find themselves behind in payments typically do not have a lot of equity to offer. Second mortgage foreclosures are not all that common in most states. For example, if your home is worth less than what you owe, a first mortgage lender will end up taking what is left leaving nothing for a second mortgage lender. This means it is highly unlikely for the second mortgage lender to foreclose.
It is important to keep in mind that although a second mortgage lender may not foreclose because it would not be financially advantageous to them, the lender may pursue other avenues to collect the money that is owed.
Second Mortgage Lenders May File a Personal Lawsuit Instead
When a second mortgage holder is out of luck on filing a foreclosure. They do have other avenues to explore. When a borrower takes out a mortgage, there are two parts: the promissory note and the mortgage or trust deed document, both of which have signed by the borrower.
This leaves the option open for the second lender to sue based on the promissory note being broken. This proactive varies state by state, so it is important to know if a lender can sue you pertaining to the promissory note if they are not able to proceed with foreclosure. When a foreclosure proceeding is completed for the first mortgage lender, the second mortgage lender’s lien is automatically eliminated. So, a personal lawsuit may be the only option your second mortgage lender has after a foreclosure.
If a second mortgage lender is granted a win in the personal lawsuit, there are a variety of ways in which they can collect on the debt. In most states, a judgment will be filed in favor of the lender and against the borrower resulting in possible wage garnishment, levies on bank accounts, or attaching a lien on other properties you may own. Until you pay the debt off, file bankruptcy and get discharges, or settle with the lender, the debt will remain until paid off.
Ways to Avoid Foreclosure
Now that you know second mortgage holders can, in fact, file foreclosure if the opportunity is right, or they can file a personal lawsuit, it is very important to know your options that will help you avoid foreclosure in the first place.
Settle the Debt
Some lenders will agree to a lump sum payment for less than what you owe. This can especially be the case when your property is worth less than what you owe. It is sometimes in the lender’s best interest to take what they can get instead of spending the money to go through foreclosure. There are possible implications to a settled debt, however, they are less than a foreclosure.
When your property is worth less than what you owe, but you are working diligently to sell your home, the lender will work with you and may agree to take less than you owe to pay the loan in full. A short sale will take some time, but if you are staying in contact with the lender, providing all documentation they need, and responsive, they will more than likely agree to a short sale. In some cases, lenders even have programs in which a seller will receive incentive money to move on by way of a short sale agreement.
When you have a second mortgage, a short sale can become complicated, however, it is possible. The first lender is the first lien holder, so in essence, they are calling all the shots. They will review your property value, what you owe on your first mortgage, and what you on your second mortgage. After that, the first lender will allow a certain dollar amount to be paid to the second lender in which they are expected to accept (the amount could equal zero). The second lender does not have to accept, and this can lead to a lot of back and forth negotiating. This scenario can happen, but it is a bit rare.
When you move forward with a short sale, it is possible the lenders involved in the short sale agreement will decide to file a deficiency judgment based on the balance you still “owe”. For example, if you owe one of your lenders $200,000.00, but the lender agreed to take $150,000.00 for the final payoff after all closing costs, that lender might file a judgment against you for the remaining $50,000.00.
In all of these instances where you may be facing foreclosure and you want an alternative; it is essential to do your research. States vary on their foreclosure proceedings, personal lawsuit qualifications and lien position rules.
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