Second Home in Foreclosure

I have separate mortgages on two homes. If I walk away from my second home, will it put my primary home at risk?

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Bill's Answer: Answered by Bills.com Staff

If you allow your home to go into foreclosure, it is likely that the amount received at auction will be much less than what you actually owe on the home, which could leave you responsible for the difference, generally referred to as a "deficiency balance."

The answer to your question, and the best solution to your problem, depends greatly on your state of residence, as state laws regarding foreclosures and the enforcement of deficiency balances vary greatly from state to state. While some states restrict the collection of deficiency balances, most states allow deficiencies to be treated like all other unsecured debts. If you end up owing a deficiency balance on your second home, it is possible that the creditor may file a lawsuit against you to collect on the debt. If the court grants the creditor a judgment against you, the creditor may be able to garnish your wages, levy your bank accounts and/or place liens on your property, including your primary residence, depending on your state’s laws relating to the enforcement of judgments.

Wise Advice Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

For more information about what action creditors can take against you to enforce judgments in your state, see the Bills.com resource Collection laws. Also, if you allow the home to go into foreclosure, you can expect the foreclosure to appear on your credit report for seven years from the date it is entered into the public records, likely resulting in significant damage to your credit rating and your ability to obtain new credit.

As I mentioned, if your mortgage company obtains a judgment against you for a deficiency balance on your second home, it may be possible for the creditor to place a lien on your primary residence. In addition, depending on the laws of your state, the judgment creditor may be able to force the sale of your primary home to obtain the money needed to pay of its judgment. Generally speaking, if an unsecured judgment creditor wishes to force the sale of a home, it must first pay off your primary mortgage on that property; once the sale is complete, it must also pay you your "exemption" amount, which varies from state to state.

You mention in your question that your residence is almost paid off, which I assume means that you have a significant amount of equity in the home. The more equity you have in your home, the more likely it is that the judgment creditor will try to proceed with a forced sale of your property, so if you have a significant amount of equity in your primary residence, you may want to think twice before allowing your other home to go into foreclosure. Before you decide what course of action to take, I strongly encourage you to consult with an attorney in your state to discuss your state’s laws and to determine the best course of action available to you in this situation.

You may be able to rid yourself of the obligation to continue paying on your second home by filing for bankruptcy protection, or pursuing a short sale. If you file for Chapter 7 bankruptcy, you may be able to surrender the property to the creditor and discharge any deficiency balance as part of your bankruptcy plan. However, since it sounds like you have a significant amount of equity in your primary home, you may risk losing that property as well, depending on your state’s property exemptions in bankruptcy. Again, I encourage you to consult with an attorney to determine the best course of action available to you to resolve this outstanding debt. If you would like to learn more about bankruptcy, I encourage you to visit the Bills.com bankruptcy page.

Tip Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

Many Americans are struggling to keep their mortgages current due to the downturn in the housing market and the increased cost of gas and other essentials, so please know that you are by no means alone in the difficulties you are facing.

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

Best,

Bill

Bills.com

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Comments (82)


Pamela S.
Portsmouth, VA  |  January 12, 2013
We have 2 homes in Virginia. One home (a VHA financed/conventional loan) is a manufactured home with more than $150K upgrades that sits on 27 acres. We have not lived in the home for 4 years (rented it for 2) and have continued to maintain it; payments are up to date and we have made every attempt to sell it (FSBO/currently have an agent). We also have a $50K equity line of credit tied to this home. Our second residence is our primary residence and our choice to move out of one home and buy another was solely based on securing a job. We are not delinquent in either of our home payments. Our primary residence is a VA-financed home. The balance on our 1st home (we'll call it the 'country house') is $143K; equity line is $50K. It has been appraised at $334K. We wish to keep our primary residence and find a way to surrender our "country home with the equity line" without deficiency penalties from the lender/equity lien holder or putting our primary residence I jeopardy with a forced sale. Any advice besides contacting a Virginia attorney and paying for his/her services that will put an even larger dent in our shrinking budget?
Bills.com
January 14, 2013
The facts in your case confuse me, but I think you are saying this:
  • Virginia House 1: Financed with a $143,000 mortgage plus a $50,000 HELOC. It is valued at $334,000, but isn't selling near that offered price. Seek to sell this property.
  • Virginia House 2: Your primary residence. Unknown VA mortgage balance, and unknown value. You wish to keep this residence.
  • You ask, "If we allow a strategic default on House 1 and there is a deficiency balance, can the holders of either the junior or senior mortgage place a lien on House 2 or otherwise place our ownership rights in House 2 at risk?"

If my interpretation of your facts is correct, here's a very brief and shallow analysis of your situation. Virginia offers minimal anti-deficiency laws that protect homeowners who face foreclosure and a deficiency balance. Virginia's homestead exemption is among the lowest in the nation. When it comes to consumer protection laws, Virginia's legislature has much to answer for to its residents.

Virginia law allows a judgment-creditor to place a lien on the judgment-debtor's real property. I cannot find in Virginia law if a judgment-debtor-lienholder is allowed to foreclose on a judgment-debtor's primary residence. This is allowed at common law, and is subject to that state's homestead exemption.

You do not mention the price that you have listed House 1, but one option is to consider a short sale if you need to list House 1 for less than $143K+$50K. Have you discussed a short sale with the servicers of your two mortgages? You may be able to negotiate a deal where any deficiency balance is forgiven.

Consult with a Virginia lawyer who has real property, mortgage mediation, or civil litigation experience before you sign any short sale-type of agreement.

Christopher P.
December 04, 2011
My father lives in Mississippi, he cosigned a home with me in Georgia. I bought the house for 200k and it's now worth 150k. I can't afford payments on this home now and my father is now retired. He still has mortgage payments on his home. What's my best scenario on getting out of my home in Georgia? I don't think he or I mind a ding to our credit scores if that helps.
Bills.com
December 04, 2011
Your main concern should not be your credit score, rather the negative effects of a default on your mortgage loan. If there is a deficiency balance, then you and your father may be subject to a court judgment and aggressive collection efforts. This may include wage garnishments, bank levies, and liens on your personal property.

You have a few options. Talk to your lender and work out a short sale or deed-in-lieu of foreclosure, including trying to negotiate an anti-deficiency clause. Also look into one of the Make Homes Affordable programs. Depending upon your situation a loan modification or a loan refinance (possibly a HARP mortgage) might be a suitable alternative to defaulting on your loan.
Madonna A.
San Dimas, CA  |  November 16, 2011
My husband of 3 hours is filing a BK we live in primary residence that has no equity. I have a condo which paid mtg for 10 years and lived in alone. My problem is loan was purchased in my husband's name. It is my condo and I pay mtg from rents I receive. Can I protect my interest?
Bills.com
November 16, 2011
The answer to your question is "maybe." Bankruptcy trustees deal with evidence and facts. What facts and evidence can you provide that the condo you mentioned is "yours" when I assume the property is titled in your spouse's name? Can you show that you purchased it 10 years ago?

Consult with a bankruptcy lawyer who will research your situation, review the evidence he or she finds, and give you a precise opinion based on your circumstances.
Jay S.
Honolulu, HI  |  October 03, 2011
I own 4 investment properties in Hawaii and have loans with Lloyd's bank that pegged the balances on the Japanese Yen. Needless to say, the Dollar has lost over 38% value against the Yen and my equity disappeared over the last 3 years. I owe more in every single property than what they are worth now and I am having a hard time keeping them up with mortgages, property taxes, management fees and repairs. I consulted with an attorney and he suggested I file for chapter 7 and discharge my debt entirely but I am concerned about my personal property which I have me and my wife on the note (not on the other 4 investment properties which only have my name on the notes). What do you think is the best course of action and could I exempt my house which has no equity in it? Thanks for your comments.
Bills.com
October 04, 2011
Jay, I have to yield to your bankruptcy attorney, when it comes to explaining the consequences of the Chapter 7. He should be able to tell you what property is protected and what assets you would be required to liquidate in a Chapter 7.

I can't give legal advice, but it is my understanding that you can protect up to $30,000 in equity in your primary residence, in a Chap. 7. With no equity, I think the issue you need to discuss with your attorney is how the BK court will view the size of your mortgage payment.
Mary R.
Monte Sereno, CA  |  June 03, 2011
My husband was forced to take a retirement package. We cashed out and purchased a condo in Hawaii. We invested the rest of the money with a financial adviser-with the bad economy last year we lost all the money. We had to default on the Hawaii condo and on our primary residence that we own in California. The Hawaii condo is now in foreclosure and the bank is taking it over. My husband got a new job and we have started paying our mortgage again in California and we are working with the bank for a loan modification. We are fearful that the bank in Hawaii will come after us for the loan deficiency and will put a lean on our primary residence in California. Please advise what the current law is in regards to our primary residence in California. Will the foreclosed property in Hawaii hurt our credit in California? We are both over 70 and have a 28 year old son who is unable to work due to emotional issues. Thank You, Mary
Bills.com
June 04, 2011
Before I answer your questions, have you considered a short sale?

The lender has the right to collect the deficiency balance following a foreclosure. You mentioned you are a California resident. See the Bills.com resource California Collection Laws to learn more about your rights and liabilities as a California resident.

Regarding your credit score, see the Bills.com resource Short Sale, Foreclosure & Your Credit Score to learn exactly how much your credit score will be impacted by a foreclosure.
Maria C.
Norwalk, CT  |  April 18, 2011
I have two mortgages and an equity loan that I can't pay anymore since I lost my job. If I stop paying the mortgage and the home equity loan to the bank, do I lose my primary residence?
Bills.com
April 19, 2011
My answer assumes the two mortgages and equity loan you mentioned are on your primary residence. The answer to your question is "yes." As my original answer above tries to explain, if you stop paying any or all of your mortgages, it is possible legally for the lender that is not receiving its payments to foreclose on the property. If it forecloses, part of that process is for your local sheriff to come to your residence and force you to vacate it.
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Pamela S.
Portsmouth, VA  |  January 12, 2013
So, what you are saying is, "if the residence is not the primary and it has an equity line" that can no longer be paid because of the economy, the primary residence and personal belongings will not be in peril of being sold/liquidated?
Bills.com
January 14, 2013
Consult with a Virginia lawyer who has bankruptcy experience. I am not suggesting bankruptcy is the proper answer here, but a Virginia bankruptcy lawyer will be well-versed in the nuances of Virginia collection laws.
Sam O.
Morgan Hill, CA  |  April 04, 2011
I owned two homes in California, but I lost my job and I had to short-sale my second home. I had first and second loans on the second home. The first loan was fully paid off during the short sale process, but less than half of the second loan was repaid. Now I have debt collectors calling me for the rest of the amount. Can they go after my primary home also in CA?
Bills.com
April 04, 2011
I have three reading assignments for you that will answer your questions about a California foreclosure and deficiency balance.
  1. Read the Bills.com resource California Mortgage Foreclosure Process to understand the mechanics of a foreclosure.
  2. Read Mortgage Foreclosure California to learn how to avoid a foreclosure in California.
  3. Finally, read California Collection Laws to understand what rights debtors and judgment-creditors have under California law.

As you will see by reading the resources I just mentioned, a judgment-creditor may have the right to garnish your wages, levy your bank accounts, or place a lien on your real property. Consult with a California lawyer to learn if and how to insulate your assets from judgment.

Sonia T.
East Point, GA  |  January 03, 2011
Hi! Your replies to others have been very helpful, so thanks in advance for those! My father lives in his primary residence in Illinois and has a second home in Georgia. He is retired at this point and can no longer afford the second home in Georgia. He is considering letting it foreclose. He is trying to do a short sale, but we are not sure the banks will take it (it has a 1st mortgage of $167K and a 2nd of $55K) and the only offer we've gotten has been $135K. If he lets it go, can the Georgia mortgage holders obtain a deficiency judgment, domesticate it in Illinois and force the sale of his primary residence there, which is nearly paid off? Could a forced sale happen even with the short sale? Most options in terms of dealing with a judgment are doable (letting it sit unpaid as a lien on the Illinois house/working out an unsecured note to pay the judgment, or filing bankruptcy if it came to that), but a forced sale of his only residence would be a definite issue. What is your take on it?
Bills.com
January 04, 2011
Sonia, my take on this is that it would be very unlikely that a forced sale would take place on your father's primary residence. I agree that the creditor could pursue the deficiency balance and domesticate a judgment in Illinois, but I feel that it would lead to a lien on his home in a worst case scenario. Try to speak to the current mortgage holders to see if they will accept the short sale, working to get them to forgive any deficiency balance. Be aware of the potential taxes that arise from forgiven debt, if any of his debt is forgiven.
Lorenzo B.
Austin, TX  |  December 13, 2010
We own a primary residence in Texas, and an investment property in Hawaii. The value has dropped considerably and we owe $40,000 more than its worth, and we are losing $500 a month on it even though we have a renter. My wife just lost her job and we cannot afford to keep paying on the Hawaii property. It has a 1st & 2nd lien and neither of the loan companies will agree to a loan modification or short sale. We dont' know what to do. We have some long-term CD's but don't want to use them for the Hawaii property, in case we need them to live if something else happens. Is it better to just stop paying and let it foreclosure; if we do, can the loan companies come after our primary residence in Texas or long-term CD's? Should we draw that money out now before deciding and hide it in a mattress? I'm glad I found this site; this is very stressful for us.
Bills.com
December 13, 2010
You mentioned you are a Texas resident. Read the Bills.com resource Texas Collection Laws to learn your basic rights and liabilities as a Texan. (Readers residing in other states should read Collections Advice for general rules.) If the mortgagees do not want to negotiate reasonably, then you have no option but to consider Strategic Default.

Regarding your CDs, if they are IRAs, then they may have a measure of insulation regarding creditor collections. If they are not retirement funds, then they may be subject to account garnishment/levy. Consult with a bankruptcy attorney to discuss protecting your assets. I am not suggesting bankruptcy is an option — it may or may not be — but a bankruptcy attorney will help you understand what steps you can take to emerge from a foreclosure unscathed.
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Bills.com
September 01, 2010
Homestead exemptions vary from state to state and apply to a person's primary residence. Maine's homestead exemption is $95,000 for a married couple. This means if your parents' home is worth more than that, then not all of the property value would be protected by the homestead exemption. I believe it is the case that homestead exemptions require a certain number of days residence in the home per year, even if they claim it as their primary residence. Their wintering in Florida may not jeopardize their ability to use a homestead exemption claim, but check and see. I think your idea that a trust may offer protection is worth examining. My best recommendation is to seek the advice of an experienced estate planning attorney that will advise you if your parents establishing a trust is a good idea. You may find it helpful to read the information at Bills.com on how to find an attorney.
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