A first mortgage foreclosure is straightforward, and there are few surprises if there are no other mortgage liens against the property. When you add another lienholder, it makes the foreclosure process more complicated. Many different things can happen with a second mortgage in a foreclosure, depending on the borrower's circumstances.
Background: Lien Position
When a property has mortgage liens placed against it, each lien takes a certain position, based on the order in which the mortgages were filed. For example, the mortgage filed first is in first position. The next lienholder is in second position, and is commonly called the second mortgage. If the first mortgage is paid off, the second mortgage moves into first position, and a third mortgage, if present, moves into second. Position indicates the order that the mortgages are paid off when the house is sold.
First Mortgage Foreclosure
If you are behind on your payments to the first mortgage company, eventually it will begin foreclosure proceedings. As the foreclosure process nears the finish, the property will be sold. When the first mortgage holder sells the property, it receives the proceeds of the sale, with any excess over the balance due on the first going to the second mortgage holder. Once all the liens have been paid off from the sale, any proceeds left go to the borrower, but that is rare. If the property is worth less than the value of the first mortgage, the second mortgage company receives nothing.
Second Mortgage Foreclosure
The second mortgage holder can foreclose on a home just like the first mortgage holder. If there is sufficient equity, both the first and second liens are paid off. Even if there is not enough to completely pay off the second mortgage, many second mortgage holders may still initiate a foreclosure because they may get some money in the sale. If the value of the home is less than the balance of the first mortgage, there is no reason for the second mortgage holder to foreclose. It would receive nothing; in this case, the second mortgage holder is essentially unsecured.
Chapter 13 Bankruptcy
If your home is in foreclosure, and you want to try to keep it, you can use a Chapter 13 bankruptcy. Chapter 13 stops collections activity immediately, stopping the foreclosure until you can work out a payment arrangement with the mortgage company. If you have a second mortgage that is fully secured by the value of the house, you will have to pay that mortgage too, although some of the payment may be modified in the bankruptcy. If your second mortgage is partially secured, the bankruptcy judge may reduce the second mortgage balance to the amount that is secured by the house. If the house is underwater, and even the first mortgage is not fully secured, the bankruptcy judge may completely remove the second lien.
- Smartmoney: FDIC Weighing Second-Mortgage Disclosure Rule For Banks
- Bankrate.com: Second Mortgage Holder Can Foreclose
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed Oct. 31, 2020.
- Internal Revenue Service. "Publication 936 (2019), Home Mortgage Insurance Deduction." Accessed Oct. 31, 2020.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.