Second mortgage foreclosure is a possibility for your lender if you don’t pay your loan. The bank may start proceedings if you have equity. Otherwise, they will sue you and get a judgment to collect in other ways.
- A home equity loan is secured.
- You can only stop the proceedings by settling the balance or filing bankruptcy.
- If the primary forecloses the junior lien holders take leftover proceeds or they sue if there is not enough equity.
A junior lien proceeding is very serious, and you can lose your home. If you face this get help immediately. Don’t think there is a statute of limitations for current liens or only primary lien holders can take your house.
Is a Second Mortgage a Secured Loan?
A second mortgage is a secured loan. You borrow the money against the equity in your home, and that means your house secures the debt. They usually come in two forms:
- Home Equity Line of Credit (HELOC) – lets you borrow money as you need it
- Home Equity Loan – gives you a lump sum at one time
They are equity loans because the equity in your house is the collateral. The primary lien has priority in foreclosure and will take the proceeds from the house sale first. If there is any money left then the junior lien gets paid. If there isn’t, then the junior home loan becomes an unsecured loan.
Can a Second Mortgage Lender Foreclose on a Property?
The lender can foreclose on a property. They may not, though. Their action depends on your situation.
- Foreclosure – If the house can be sold, pay the first lien, and still have money left to pay the second.
- A personal lawsuit – If there is no equity the lender must get a settlement like an unsecured liability.
The lawsuit leads to a judgment that allows the bank to garnish your wages, levy your bank account(s), and place liens on other property.1
Can a Second Mortgage Foreclose Come Before the First?
A second lienholder can foreclose before the first. If you keep up payments on your primary, but not your junior, loan. The junior lienholder may foreclose.
Can You Lose Your Home to a Second Mortgage Foreclosure?
You can lose your home to a second mortgage foreclosure. If you don’t keep up with payments and there is equity in your home, then the bank will sell your property. Don’t think that your house is safe if you pay your primary and let your secondary home loan default. Your secondary lender will foreclose regardless of the status of your primary home loan.
How to Stop a Second Mortgage Foreclosure
The only time a lender will foreclose on a junior loan is if there is equity in the property. Otherwise, the bank will sue and get a judgment. That means you have three options:
- Pay off the debt if you have enough money
- Sell your home and use the proceeds to settle your accounts
- File bankruptcy
If you think you can wait it out and it will go away, remember that there is no statute of limitations on active liens. It only applies to cases where the court already decided. Your lender has a certain time after a foreclosure or judgment to collect the money. There is no time limit for foreclosing or filing a lawsuit.2
What Happens to a Second Mortgage in a Foreclosure?
When your primary lender forecloses, all junior lien holders get in line for any proceeds left. It does not wipe out other liens if there isn’t enough equity. The process for junior liens is:
- They collect from proceeds after the primary lien is satisfied.
- If there is not enough money they file suit against the borrower.
- The court issues a judgment against the borrower for the balance of the debt.
- The bank seeks to collect by garnishing wages, levying bank accounts, or putting a lien on other property.
If you file bankruptcy you may get this reorganized or discharged by the court. Also, if they do get a judgment, they are subject to the statute of limitations, so they have a defined time period to collect from you.
How You Can Get Rid of a Second Mortgage?
You can get rid of a junior lien by selling your house or liquidating other assets to settle the debt. You can also file bankruptcy. If you go this route you have two options depending on your financial situation:
- Chapter 13 is for higher-income people and reorganizes debt.
- Chapter 7 is for lower-income borrowers and liquidates assets.
This course severely damages your credit. You should only do this as a last resort if you really have no other way to deal with the situation.
Discharge in Chapter 13
The courts can discharge your junior lien in Chapter 13. They do this by stripping the lien from the house and making it an unsecured debt like credit cards.
- You don’t make payments outside of your bankruptcy.
- You pay a portion of the debt through your plan.
- The plan takes 3-5 years to complete.
- When you complete your plan, the court discharges any remaining debt.
If you don’t complete your plan, or the court dismisses your case for any other reason, your lien doesn’t get stripped. You will still have to pay it according to the original terms.3
Discharge in Chapter 7
Chapter 7 wipes out your debts by liquidating your assets, this includes your house. If you are underwater, the court-appointed trustee will sell your house and use the proceeds to pay creditors. If you have equity, then a homestead exemption may allow you to keep some money from the sale.
Once the trustee sells the property, the court discharges the remaining debt. You lose your home, but you also lose all debt associated with it.4
Final Thoughts on Second Mortgage Foreclosure
Second mortgage foreclosure is a very serious problem. You can lose your home because it is a secured debt. The only reason a lender won’t foreclose for a junior lien is if there is not enough equity to pay the primary and leave money to pay their balance. However, in that case, they will sue you and get a judgment from the court to collect in other ways.
Your only options are to settle the debt or file bankruptcy. In most cases, you will lose your home. You may have to sell it in order to get enough money to settle, and in the case of Chapter 7, the trustee will sell your house to pay creditors before they discharge any debt. Chapter 13 may strip the junior lien and discharge it as an unsecured liability.
If you are late on secondary loan payments, don’t think that the bank won’t take your house. You are in danger of losing your home, and you need to get help before that happens. Talk to a financial counselor as soon as you know you are in danger of defaulting.