Information about consequences of default on second mortgage

UpdatedJan 28, 2008

Key Takeaways:

If you default on your second mortgage, the mortgagee can foreclose.
Try to work out a forbearance plan.
Bills.com offers additional information for people in default on their second.

What happens if you are good with the payments on your first mortgage but default on your second mortgage?

What happens if a person has a first and a second mortgage on their home and a spouse loses a job and the new job he gets does not pay enough to pay the first and second mortgage? What happens if they decided to continue paying the first but let the second fall behind? Besides being a black mark on credit reports what can the second holder do? Can they foreclose on the home? The second is $100k and the first is $300k.

A lender has the option to foreclose when a borrower become delinquent on their mortgage, whether the mortgage is a first or a second. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of the loan and the state where the property is situated. Generally speaking, if mortgage payments are not received within 150 days, the bank may proceed with the foreclosure process. Upon foreclosure, the second mortgage would be repaid after the first mortgage is paid in full.

If the sale price is less than the value of the mortgages held against it, then in some states the homeowner may still owe an unsecured balance called a deficiency balance. The good news is that this new deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt that you could conceivably enroll into a debt settlement program. I will explain more about the consequences of being in default on a second mortgage in just a moment.

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In some cases, it may be impossible to make any payments at all for some time. For those who have a good record with the lender, a "forbearance plan" will allow them to suspend payments or make reduced payments for a specified length of time. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if the borrower defaults on the agreement.

Foreclosure has serious repercussions, especially to a homeowner’s credit score. If you can, avoid a foreclosure, perhaps by agreeing to a short sale. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.

See Can a Second Mortgage Holder Foreclose if the First Mortgage is Current? for a more complete discussion of this subject. You can find more about foreclosures on the Bills.com Foreclosure information page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

10 Comments

KKimberly, Dec, 2011

The goal is to lower the new mortgage amount to approximately $3000 below the house's current market value. The homeowners will have instant equity and a payment they can afford. We will help them start to rebuild their financial health. Banks call these homes toxic assets. We call them homeowners.

AAnonymous, Nov, 2011

I filed chapter 7 bankruptcy and neither my first or second mortgage was reaffirmed. We are behind on first mortgage but current on second. What would happen if we stopped paying on the second? We owe more than what we can sell it for. Since we did not reaffirm, are we not responsible for either loan? Can either lender sue us or garnish wages?

BBill, Nov, 2011

You answered your question yourself. 1. You filed for chapter 7, and I will assume the mortgages were included in the discharge. If so, this removes your personal liability for the notes. 2. You did not reaffirm either mortgage. By not reaffirming, you kept your non-liability for the notes.

You have no personal liability for either mortgage. Should either lender pursue you for any deficiency balance, the pursuer will be in violation of federal law.

Consult with your bankruptcy lawyer to verify what I wrote here.

CChristine, Nov, 2011

I currently own 2 homes. The 2nd home is an adjustable loan with a 2nd mortgage. If I were to foreclosed on this property due to financial difficulties, how will this hurt me when I am able to purchase another home in 5-6 yrs from now?

BBill, Nov, 2011

You could very well be affected five to six years down the road, if you stop making payments on your second home mortgages now. First, it will take time before a foreclosure takes place. Then, you have to deal with not only the credit impact of the foreclosure but with the deficiency balance that results.

Maybe you can get the lender to forgive part of the debt (which could cause you to owe taxes for debt forgiveness). Maybe it will end up with the lender suing you and getting a judgment against you that will preclude getting another loan without first paying or settling the judgment. There are too many possibilities to tell you exactly what will happen, but most of them are unfavorable.

kksenia, Nov, 2011

Purchased a home in 2007 for 265k. 1st mortgage 30-y fixed 4.8% 210k never late payment with B of A previously Countrywide. Second mortgage 38k with different lender recently Green Tree 10.375% previously Countrywide, BofA now Green Tree. None of them is willing to put them together or refinance. I came to a point with my husband that we cant pay the second because of financial situation. Our house is now worth 215k but i want keep the house. What would happen if i stop paying the second? Will the Green Tree foreclose? should i get lawyer? We pay 12% more from our income according to the calculations. what would happen to my Credit cards, i know that my credit score suffer, but will they close my accounts?Please advise Thank you

BBill, Nov, 2011

If you stop making payments then the second mortgage lender will be able to foreclose, even if you are current on your first loan. If you decide to stop paying, then you should see a lawyer to help determine if the loan is a non-recourse or recourse loan, what kind of collections the bank is likely to pursue, and what your obligations will be if a deficiency balance results.

Delinquent payments and foreclosure will damage your credit scores, but if you are making your mandatory payments on time then your accounts should not be closed. If you have a bank account or credit card account with the same bank where you have a delinquent mortgage, your bank and credit accounts could be affected.

MMike, Oct, 2011

What are my options? I recently (1 yr.) moved into a new home and continued to pay for first house. First house is underwater owe 80k house worth 28k. I pay about $600 for 1st home and 1400 for 2nd home, I am not behind on any payments. I don't want to continue putting money into the first home knowing i will never get any return. What would you advise.

BBill, Oct, 2011

I can't offer much advice, based on what you wrote. A lot depends on if your first house's loan is a recourse or non-recourse loan, as well as the anti-deficiency protections in your state.

Other factors are how much of your income could be garnished, whether you can rent the home for what you are paying on your mortgage, what you project your future income to be, and the likelihood that the first house lender would to sue you if you walk away,

LLucky, Sep, 2011

purchased new home 12-28-2005.. 1st mortgage 30-yr fixed Jumbo with 10-yr Interest Only; 2nd mortgage HELOC 10 yr interest only then 15 years. Never a late payment but am underwater from $230K (1st) & $45K (2nd) with current home value approx. $90K in Phoenix AZ. I lost my job two months ago and trying to make decisions based upon where I find work. If I must move, I would choose to walk away, give it back to the bank (both with BofA - previously KB home/CountryWide) Should I secure a rental home before missing payments? What are my liabilities? Please advise. Thank you.