Information about consequences of default on second mortgage
- 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.
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.
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.
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.
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,