Second Mortgage Foreclosure: What Happens When You Can’t Pay?
Second mortgages are junior liens that get paid only after first mortgages in foreclosure. If your home is underwater, your second mortgage lender likely won't foreclose but may sue you for the unpaid balance instead. You have options including settlement negotiations, short sales, loan modifications, and bankruptcy to help you avoid foreclosure or eliminate second mortgage debt.
Respond to LawsuitFacing foreclosure is stressful. A second mortgage makes things even more complicated. You need to understand what happens if you can’t pay and what options you have.
What Is a Second Mortgage?
A second mortgage is an additional loan secured by your home. It lets you borrow against your home equity.
Facing a Second Mortgage Lawsuit?
If your second mortgage lender is suing you for unpaid debt, you must respond to the summons. Solo helps you file the right response and negotiate a settlement before court.
Get Help NowYour second mortgage is a junior lien. That means it’s second in line for repayment if foreclosure happens. You’ll typically pay higher interest rates than your first mortgage.
The amount you can borrow depends on your equity. Equity is your home’s market value minus what you owe on your first mortgage.
- More equity means you can borrow more
- Less equity limits your borrowing power
- Being underwater (owing more than your home’s worth) makes qualifying harder
Types of Second Mortgages
You can choose from three main types:
Home Equity Lines of Credit (HELOCs)
HELOCs work like credit cards. You borrow what you need up to your limit.
You get a 10 to 15 year draw period. During that time, you make interest-only payments. After the draw period ends, you repay the full balance over 10 to 20 years.
Home Equity Loans (HELs)
Home equity loans give you a lump sum upfront. You repay it in fixed monthly payments over 5 to 20 years.
These loans usually have higher interest rates than first mortgages. They cost more to borrow.
Cash-Out Refinancing
Cash-out refinancing replaces your existing mortgage with a larger one. You get the difference in cash.
You might get lower interest rates. But you reset your loan term and may take longer to pay off.
Why People Take Out Second Mortgages
Homeowners use second mortgages for several reasons:
- Down payments: Cover upfront costs when buying a home and avoid private mortgage insurance
- Debt consolidation: Replace high-interest credit card debt with lower-rate home equity debt
- Home improvements: Fund renovations that increase your property value
- Major expenses: Pay for college tuition or other significant costs
What Happens When You Can’t Pay Your Mortgage?
When you take out a mortgage, you sign two key documents. The promissory note promises you’ll repay the loan. The mortgage gives your lender a legal claim to your property.
Your lender can take back your property if you stop paying. That process is called foreclosure.
Foreclosure begins when you default on your mortgage payments. The timeline depends on state laws and your loan agreement terms.
What Happens If You Can’t Pay Your Second Mortgage?
Your lender has the right to take action when you stop paying. Here’s what could happen:
- Collection efforts: Your lender charges late fees and contacts you repeatedly
- Foreclosure proceedings: Your lender may start foreclosure, though this is less common
- Lawsuits: Your lender can sue you for the unpaid balance if foreclosure doesn’t cover the debt
Your state’s laws determine how and when lenders can act.
Can a Second Mortgage Lender Foreclose on Your Home?
Yes, but it depends on your home equity.
If your home is worth more than you owe, foreclosure is possible. Your second mortgage holder may foreclose to recover their money.
If your home is underwater, foreclosure is unlikely. The second lender would get little or nothing from the sale.
Instead of foreclosing on underwater homes, lenders often sell your debt to collection agencies. They may also sue you directly for the unpaid balance.
Who Gets Paid First in a Foreclosure?
Debts get paid in a specific order during foreclosure. A lien is a legal claim against property used as collateral.
The rule is “first in time, first in right.” Earlier liens have higher priority. Here’s the payment order:
- Unpaid property taxes: Tax liens take top priority over all other debts
- First mortgage lender: Your primary mortgage holder gets paid next
- Second mortgage lender: Gets whatever money remains after paying the first mortgage
Second mortgage lenders often lose money in foreclosure sales. They’re especially vulnerable when homes are underwater.
If there isn’t enough equity, your second lender loses their secured interest. They become an unsecured creditor instead. They may sue you directly to recover the balance.
How Changing Your Mortgage Affects Lien Priority
Refinancing your first mortgage can affect lien priority. Your first mortgage lender will require a subordination agreement.
A subordination agreement keeps your first mortgage in priority position. Without it, your second mortgage could move ahead in repayment order.
You’ll need a subordination agreement when:
- Refinancing: Your new loan would be “newer” than your second mortgage
- Short sale: Both lenders must agree on splitting the proceeds
- Loan modification: Your first mortgage terms change to help you avoid foreclosure
First mortgage foreclosure on underwater homes can eliminate second mortgage claims. Your second lender may sue you personally for the remaining balance.
What Happens If Foreclosure Doesn’t Cover Your Second Mortgage?
Your second mortgage lender may pursue the remaining balance after foreclosure. The unpaid amount is called a deficiency balance.
Second mortgage lenders get paid only after first mortgage lenders. They often recover little or nothing, especially on underwater homes.
Many second mortgage lenders sue homeowners for unpaid balances. A deficiency judgment allows them to:
- Garnish wages: Deduct money directly from your paycheck
- Levy bank accounts: Freeze or withdraw funds from your accounts
- Place liens: Put legal claims on other property you own
You must respond if you receive a deficiency lawsuit summons. Failing to respond results in an automatic judgment against you.
Some homeowners negotiate settlements or request short sales before going to court. Our partner Solo helps you respond to lawsuits and negotiate with creditors.
What You Can Do If You’re Facing Foreclosure
You have several options to help avoid foreclosure:
Negotiate a Settlement
Some lenders accept lump-sum payments for less than you owe. Your lender may agree if your home is underwater. They risk getting nothing in foreclosure.
Request a Short Sale
You might sell your home for less than you owe. Both your first and second mortgage lenders must agree. You settle your debts and avoid foreclosure.
Apply for a Loan Modification
Some lenders adjust your mortgage terms. They might lower your interest rate or extend your repayment period. Your payments become more manageable.
Explore Foreclosure Mediation
Some states offer foreclosure mediation programs. You meet with your lender to discuss alternatives. You might work out a repayment plan or loan modification.
Consider Bankruptcy
Chapter 7 bankruptcy may eliminate your second mortgage debt. Your home must be underwater for this to work. Chapter 13 bankruptcy helps you catch up on overdue payments over time.
You can speak with a bankruptcy attorney for free to explore your options.
Work With Housing Counselors
HUD-approved housing counselors provide free support. They help you understand your options and negotiate with lenders. You can find a counselor through the HUD website.