What Happens if a Second Mortgage Is Not Settled?

If you can't pay your second mortgage, you may choose to negotiate a settlement. This involves the lender allowing you to pay only a percentage of the total amount you owe and considering your entire debt paid off. Settlement is a good option if you have the funds to make the lump sum payment. If you don't settle your second mortgage and continue to miss your payments, you may face serious penalties.

Foreclosure

Even if you are current on your first mortgage, the second mortgage lender can choose to foreclose on your property. This means that you will lose your home. The lender will sell the property to cover your debt. However, because the first mortgage lender has priority of payment, the second mortgage lender will have to pay the first mortgage lender in full before taking any of the sale proceeds. This is more likely to happen if you have significant equity in the property.

Deficiency Judgment

After a foreclosure sale, the second mortgage lender might still not have enough money to cover your entire debt. Depending on the state, the lender may be able to demand payment for the deficiency balance, which is the difference between the sale price and the outstanding loan amount. In some states, the lender can't pursue the deficiency balance. Your state laws and mortgage documents can help you determine if your mortgage lender will be able to come after you for the deficiency balance.

Lack of Equity

In a foreclosure, the second mortgage lender only gets whatever is left after paying off your first mortgage loan balance. As such, it does not make financial sense for the second mortgage lender to foreclose if your home value is low. For example, if your home is worth $75,000 and you owe $80,000 on your first mortgage alone, then the second mortgage lender will not get anything from a foreclosure. In this situation, the second mortgage lender is unlikely to exercise the right to foreclose.

Non-Settlement Options

Besides settlement, you can negotiate another option with the second mortgage lender. The second mortgage lender may modify the mortgage loan so you can afford the regular payments. The lender might also allow you to miss several payments or make lower payments temporarily until you financially recover. If negotiations with the second mortgage lender don't produce results, you could file for bankruptcy. The bankruptcy court might allow you to only pay a percentage of your second mortgage loan balance or even eliminate the loan altogether.

References

• Bankrate; 3 Ways to Lose a HELOC, Keep the House; Justin Harelik; October 2009
• The Mortgage Professor; Can a Mortgage Lender Profit from Foreclosure; Jack Guttentag; January 2004
• Bills.com: Can the Lender of a Second Mortgage Foreclose if the First is Current?; August 2011
• The Mortgage Professor; Mortgage Payment Problems: What if You Can't Pay?; Jack Guttentag; February 2010