Can Your Second Mortgage Foreclose on Your House?
The holder of a second mortgage, like that of a first (or primary) mortgage, has the legal right to begin foreclosure proceedings against a borrower if the borrower is seriously delinquent in paying. That's true even if the first mortgage is current. However, because of the nature of second mortgages, lenders who hold them may be more reluctant to start foreclosure proceedings than the holder of a primary mortgage.
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Second Mortgages
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A second mortgage is a loan secured by real estate, usually a home, and is taken out on the property after the primary (or first) mortgage. There are two main kinds of second mortgages. A home equity loan is like a primary mortgage in that it's a lump-sum loan paid back over time with a fixed rate of interest. Home equity lines of credit, by contrast, have a variable interest rate and can be drawn upon as needed by the borrower, up to a certain limit.
Foreclosure Basics
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Foreclosure proceedings vary from state to state, but a good rule of thumb is that a lender can begin the process in earnest after nonpayment of a first or second mortgage for 120 or 150 days. Generally, the borrower can stop the process by paying the amount needed to make the loan current again, or by negotiating some other arrangement with the lender. For the lender, the point of a foreclosure is to try to recover all or some of the loan amount by selling the property.
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Second Mortgage Risks
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For a borrower, a second mortgage represents the same kind of obligation to repay in a timely way as a first mortgage. For a lender, a second mortgage is riskier because in case of foreclosure, the primary mortgage must be paid first, with any remaining proceeds going to pay the second mortgage. If the proceeds from a foreclosure sale aren't even enough to pay off the primary mortgage, the holder of the second mortgage gets nothing from a foreclosure.
Alternatives to Foreclosure
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Because a second mortgage lender is at higher risk of losing all or part of the loan amount, holders of second mortgages are often more willing to negotiate with a delinquent borrower than primary-mortgage lenders. In some cases, a lender might allow a borrower to suspend or reduce payments for a specified period of time, especially if the lender believes the borrower's finances will recover. Also, a lender might offer to accept a smaller amount than the balance to extinguish the second-mortgage debt rather than push a homeowner into foreclosure.
Legal Action by Lenders
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On the other hand, if state law allows it, a lender can take a nonpaying second-mortgage borrower to court to try to win a judgment, especially if a standard foreclosure has yielded little or nothing for the lender. This is more likely in cases involving large loan amounts, and in which the lender believes that the borrower can pay but isn't --- in other words, walking away from the loan --- because the house is worth less than the amount owed, in what's known as being "underwater."
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References
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