Ross Garner, WalletHub Community Manager
Yes, a second mortgage holder can foreclose, even if you are current on your first mortgage. Just like any type of loan, if you are behind on your payments, the lender has the legal right to take whatever property was offered as collateral on the loan. In the case of a second mortgage, that means they have the right to foreclose on the house and sell it to recoup their losses. However, in many cases second mortgage holders are might not do so because there might not be any money left for them after the sale of the home.
When a house is sold by a lender there is a significant amount of expenses that need to be paid (real estate fees, taxes, etc.) before any monies can go to paying off mortgages. After taking care of expenses, the mortgages will be paid off in order of priority; until the first mortgage is fully paid off, the second mortgage holder will not receive any funds. This situation where a home is worth less than the mortgages held against it has become very common after the Great Recession.
That’s why second mortgage holders are far more likely to negotiate and work with a borrower to arrange a new payment plan. If you are behind on a second mortgage, simply communicating with your lender can often save your home. With good communication, even serious problems like losing your job or medical issues may be handled so that you can keep your home, and avoid a foreclosure. However, if the borrower has a track record of late payments, or a bad credit history a lender might not be willing to negotiate a new repayment plan. Still, explaining your financial situation honestly to your lender is your best protection against second mortgage foreclosure.
John Brooks, Member
There are a lot of people who ask whether their second mortgage can foreclose and the simple answer is that they absolutely can. However, there are some variables that affect that decision. You should understand that your second mortgage is not the primary collateral holder; the first mortgage would hold have honor and the first mortgage will always receive its funds if the house is foreclosed before others get what’s left.
If you are paying your first mortgage regularly and simply cannot afford the second mortgage, whether it is a home equity loan or a home equity line of credit and the property is underwater, the odds that the second mortgage will foreclose are slim to none. If they took the home and sold it, they would have to pay off the first mortgage and what is left would be theirs but since the value is less than the first mortgage, they’ll get nothing. It’s not worth their time. In this scenario they do have the option to not foreclose and simply sue you for the debt as well as all expenses which can be a large sum and damaging to your credit.
If your home has some equity in it, meaning the amount owed on the first mortgage is less than the home’s value, they will more than likely foreclose if some form of payment arrangement cannot be made. If this occurs, they will settle the debt owed on the first mortgage and the additional money from the equity is theirs to reduce or pay off the second mortgage. In this scenario, they recoup some, if not all of their loan to you.
As you can see, the second mortgage holder can foreclose on your home if they have an opportunity to recover any monies from the sale. If there is no possible way for them to make it worth their while to foreclose, you are more than likely going to be sued for the debt. Considering this can damage your credit severely, it is always wise to try and work out some form of repayment that you can manage if you are behind on a second mortgage.
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