Failure to Pay a Second Mortgage
Many homeowners find themselves in a difficult position financially and are unable to make the payments on their second mortgages. Even though your property secures a second mortgage just like the first mortgage, there are some special considerations when you don't make the payments on your second mortgage. Knowing how to handle a second mortgage can let you stay in your home instead of being foreclosed on.
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Significance
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A second mortgage is a loan that is secured by a lien on real estate. It is in second position to the first mortgage. This means that in the event of a sale or foreclosure, this loan is paid with any proceeds left over after the first mortgage is paid.
Considerations
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Real estate does not always rise in value. It is possible for a home to lose enough value so that if it were sold the proceeds would not pay off the first mortgage entirely, let alone the second. In these cases the second mortgage is essentially an unsecured loan.
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Effects
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If you do not pay your second mortgage, the lender can begin collection actions. They can sue you for the balance of the mortgage and attach bank accounts or garnish your wages. A second mortgage holder can also foreclose on your home, however they generally will not do this unless there is a financial benefit to them. Since the first mortgage holder gets paid first in a sale or foreclosure the second mortgage holder will receive nothing if the sale of the house does not bring enough money to pay off the first mortgage.
Prevention/Solution
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If you are not able to make payments on your second mortgage, try to work out an arrangement with the lender. They may be much more willing to work with you if they are in an unsecured position or if they see that you are sincerely unable to pay them. It is in their interest to keep you in the home with their mortgage intact until property values increase and they are secured again. If there is enough equity to pay off both the first and second mortgage on sale of the house, then expect the second mortgage company to begin foreclosure proceedings.
Chapter 13 Bankruptcy
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If you are in a situation where your second mortgage is unsecured due to a drop in property values, a Chapter 13 bankruptcy may help you. In a Chapter 13, you can perform a lien strip, which is where the court removes the second mortgage lien against the property and the loan is treated as an unsecured loan. The second mortgage holder is then paid back as an unsecured creditor as you make your payments under Chapter 13. Consult with an attorney to see if this may apply to you.
Warning
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Always make your first mortgage payment if you are able. Keeping the first mortgage current may keep you in your home, as the first mortgage holder is the most likely to foreclose in case of delinquency.
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