Information about consequences of default on second mortgage

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

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Bill's Answer: Answered by Mark Cappel

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

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Comments (222)


Kimberly R.
December 18, 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.

Youngstown, OH  |  November 21, 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?
Bills.com
November 22, 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.

Christine H.
Hayward, CA  |  November 10, 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?
Bills.com
November 10, 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.
Ksenia M.
Lyndhurst Twp, NJ  |  November 05, 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
Bills.com
November 06, 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.
Mike C.
Garfield Heights, OH  |  October 27, 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.
Bills.com
October 27, 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,
Lucky V.
Phoenix, AZ  |  September 15, 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.
Laura K.
Greenfield, WI  |  September 09, 2011
I filed Ch7 that was discharged in 2009 and my 1st mortgage was included in the Ch7 (only because the lender didn't get the reaffirmation papers to us in time). The 2nd mortgage, with a local credit union was reaffirmed. I think we had a terrible attorney that never should have allowed us to sign to reaffirm the 2nd if we hadn't signed on the 1st. I believe the value of the house is less than the first mortgage, so the CU would never see a penny if we foreclosed. We do not currently owe the first mortgage, though we continue to pay and live there. I wonder if it is worth my time to talk to the credit union about restructuring the 2nd mortgage so we can repay it (unsecured?), but get out of the house. The value of the 2nd is about $30K. We would like to be able to move to a different house in a better area, closer to my daughter's school. I assume we will only be able to rent, but should be able to rent something that is cheaper than we currently pay on the first mortgage. I hope you can give me some advise on this crazy situation.
Bills.com
September 09, 2011
I am reluctant to weigh in with a thought regarding your situation without knowing more. If I understand you correctly, you filed for chapter 7, did not reaffirm the senior loan, but did reaffirm the junior. You want to know if it is possible to negotiate a lump-sum settlement with the junior. If my interpretation of your question is correct, then yes, you have no reason not to try to negotiate a lump-sum settlement for the junior. The servicer for the junior has an incentive to negotiate if, as you suggest, the value of the property is less than the balance of the senior.
Michelle A.
Eatontown Borough, NJ  |  September 06, 2011
I have a 1st mortgage of $265000.00 2nd of 40,000.00, and secured credit card (3rd) of 20,000.00. House is worth $224,000.00. Missed 1 payment of the first, and 1 payment of the second. Trying to work with lenders, not very helpful at all. What happens if i stop paying everything and walk away? I know they will foreclose, how long does it take? Can they attach my wages in nj?
Bills.com
September 06, 2011
The foreclosure process varies by state, and each state legislature set a different timetable for the process to complete. New Jersey has one of the longer processes, and takes a minimum of nine months or so.

See the Bills.com resource Collection Laws & Exemptions by State to learn more about each state's collection laws.
Victor C.
Carmichael, CA  |  September 05, 2011
In 2004 my dad did not qulify for a home loan. I purchased the home only on my name and right after the close of escrow trasfered the title on my dad's name. After several months he pulled out home equity line of credit only on his name. For all these years he paid the 1st and 2nd loans. Now, the 1st is about 200k and 2nd 50k and the home will sell for about 150k. He told me that he is not going to pay the 2nd mortgage any more. What can happend in this situation? I live in another home, where I got some equity. thanks.
Bills.com
September 06, 2011
The risk in not paying a home loan as contracted is foreclosure. I surmise you are still the borrower on the senior loan. If so, and if there is a foreclosure, the risk is that you will be liable for any deficiency balance, assuming the property sells at auction for less than the balance of the senior.
Julie K.
Oak Park Heights, MN  |  August 07, 2011
My husband and I filed chapter 13 bankruptcy last year. I got laid off and our income was cut by 60%. We have 2 mortgages 1st is 180k second is 48k. House would be valued around 160k. The attorney did not do the "stripping" at the bankruptcy. We are trying to get the interest rate on the second lowered from 7.98% and they are not working with us at all. What if we just stopped paying on the second but kept up with the first, could/would they foreclose? First is Wells Fargo, second is TCF.
Bills.com
August 08, 2011
The second mortgage holder can choose to foreclose on you, if you default on your loan. Because it won't get any money in a foreclosure, as the first mortgage lender is in line to get all the proceeds available, it is not clear that the second mortgage lender will choose to foreclose, but it has the right to do so.
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