Foreclosure Effects on 1st Mortgage & 2nd Mortgage
Your mortgage lender has a security interest in your home that allows it to take title to your home through foreclosure if you fail to make your mortgage payments. The same is true of a home equity loan (also called a second mortgage) and home equity lines of credit (HELOCs). This article explains the relationship between first and second mortgage loans when your first mortgage is in foreclosure.
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Mortgage Loans Are a Matter of Public Record
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When you buy a home or take out home equity financing, you'll sign mortgage loan documents that become a matter of public record. These documents assign a collateral interest in your home to your mortgage lender, and allow your lender to foreclose if you don't make payments.
The Role of Real Estate Title Law in Foreclosure
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Public records show the "chain of title" for your home. Your name is shown as owner of record, then your first mortgage lender, and subsequent lenders if you have taken out home equity financing..
Foreclosure: Communication Between First and Second Mortgage Lenders
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By law, when your first mortgage lender starts foreclosure, the lender must notify anyone with a legal interest in your property. This includes your second mortgage holder. How or if the second mortgage holder decides to respond depends on a variety of factors.
How Your Second Mortgage Lender Can Respond to Foreclosure
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If you have equity in your home, your second mortgage holder may pay the funds needed to bring your first mortgage current and stop the foreclosure. They will then ask you to repay the amount they advanced to your first mortgage lender. If you don't pay, the second mortgage holder can start its own foreclosure.
If your home is worth less than you owe on mortgage loans, your second mortgage holder will likely do nothing and allow your first mortgage holder to foreclose. The second mortgage will then be charged off by the lender, an action that will appear on your credit record.
Avoiding Foreclosure
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If you can't make your mortgage payments, contact your mortgage company immediately. Ask to speak to their loss mitigation department. See if you can work out a modification of your loan or other method for avoiding foreclosure.
It costs a lot of money to stop a foreclosure, and you'll be paying legal fees and costs in addition to making up past-due payments. If a foreclosure is completed, you can expect to have low credit scores for seven to 10 years.
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