If you have a second mortgage on your home and fall behind in payments, the second mortgage lender may or may not foreclose, depending on the value of your home. Read on to find out what happens if you stop making payments on a second mortgage and when that lender may decide to initiate a foreclosure. (To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
A second mortgage is a loan you take out using your house as security that is junior to another mortgage (a first mortgage). A few common examples of second mortgages are home equity loans and home equity lines of credit (HELOCs).
A senior lien, such as a first mortgage, takes priority over a junior lien, such as a second mortgage. Priority determines which lender gets paid before other lenders after a foreclosure sale.
Generally, priority is determined by the date the mortgage or other lien is recorded in the county land records (though some liens, such as property tax liens, have automatic superiority over essentially all prior liens). First mortgages are, as the name suggests, typically recorded first and are then in first lien position. Second mortgages are usually recorded next and are therefore in second position. Judgment liens, if there are any, are often junior to a first mortgage and possibly a second mortgage, as well as perhaps other judgment liens previously filed by other creditors. (Learn more about when a creditor is allowed to place a lien on your property.)
If you refinance your first mortgage, that lender will require the second mortgage lender to execute a subordination agreement. In a subordination agreement, the second mortgage holder consents to subordinating its loan to the refinanced loan. The subordination agreement allows the refinanced loan (the newest loan), which would be junior based on the recording date, to jump ahead in line and take the place of the first lender in terms of priority.
A lender can choose to foreclose when a borrower becomes delinquent on its mortgage, whether the mortgage is a first or a second mortgage. If you default on your first mortgage, that lender will very likely begin foreclosure proceedings. If, on the other hand, you default on a second mortgage, whether or not that lender initiates a foreclosure will depend mainly on the current value of your home. (To learn about the foreclosure process in your state, check our Summary of State Foreclosure Laws.)
If you have equity in your home (this happens when the value of your home is greater than the amount you owe on your first mortgage), your second mortgage is at least partially secured. When you fall behind in payments on the second mortgage, the second mortgage holder will probably initiate a foreclosure because it will recover part or all of the money it loaned to you once the property is sold at a foreclosure sale. The more equity there is in the property, the greater the likelihood that the second mortgage holder will foreclose.
If your home is underwater (this happens when the value of your home is less than the amount you owe on your first mortgage), your second mortgage is effectively unsecured. This means that if the second mortgage holder were to foreclose, there wouldn't be enough proceeds from the foreclosure sale to pay anything to that lender.
In most cases, if you're underwater and fall behind on payments for your second mortgage, the holder of the second mortgage will probably not start a foreclosure since all the proceeds from the foreclosure sale would go to the senior lender. However, the junior lender could still sue you personally for repayment of the loan.
Even if the second mortgage holder decides not to foreclose, that lender can sue you to recover the money it loaned you. This commonly happens after the first mortgage holder forecloses (though it could happen sooner). In a first-mortgage foreclosure, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. This is referred to as a “sold-out junior lienholder.”
Sold-out junior lienholders. When a junior mortgage holder has been sold-out in a first-mortgage foreclosure, that junior mortgage holder usually can, depending on state law, sue you personally on the promissory note to recover the money. (Learn more in Nolo’s article What Happens to Liens and Second Mortgages in Foreclosure?)
How second mortgage holders collect from you. If the junior lender wins the lawsuit and gets a money judgment against you, generally the lender may collect this amount by doing such things as garnishing your wages or levying your bank account. (Learn about methods that creditors can use to collect judgments.)
Filing for bankruptcy may provide some relief. A bankruptcy can reduce or eliminate this type of debt. (For more articles on bankruptcy, including bankruptcy basics, bankruptcy procedures, and specific information about filing bankruptcy in your state, visit our Bankruptcy topic area.)
If you are struggling to make your first and/or second mortgage payments, your home is underwater, or foreclosure is imminent, visit our Alternatives to Foreclosure area.