Second Home in Foreclosure
- 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.
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.
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.
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.
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