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?

I have separate mortgages on two homes. The smaller house, which I now live in, is almost paid for and I plan to stay here. I plan on "walking away" from the second home because I cannot sell it because the mortgage is more than the house is worth. Will this have any effect on the smaller house I live in. Can the lender put a lien on the second property? Also, how many years will this reflect on my credit? Please advise. Thank you for your help.

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Bill's Answer
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  • If you allow foreclosure, it is likely your home will be sold at auction.
  • You will have liability for any deficiency balance.
  • Pursue a short sale or deed in lieu of foreclosure to avoid foreclosure.

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.

ach 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.

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

82 Comments

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  • PS
    Jan, 2013
    Pamela
    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?
    0 Votes

    • BA
      Jan, 2013
      Bill
      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.

      0 Votes

  • CP
    Dec, 2011
    Christopher
    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.
    0 Votes

    • BA
      Dec, 2011
      Bill
      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.
      0 Votes

  • MA
    Nov, 2011
    Madonna
    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?
    0 Votes

    • BA
      Nov, 2011
      Bill
      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.
      0 Votes

  • JS
    Oct, 2011
    Jay
    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.
    0 Votes

    • BA
      Oct, 2011
      Bill
      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.
      0 Votes

  • MR
    Jun, 2011
    Mary
    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
    0 Votes

    • BA
      Jun, 2011
      Bill
      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.
      0 Votes