Second Mortgages After Foreclosure: Who Pays?

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What is a second mortgage?

Oftentimes, when applying for a home loan, first time home buyers don’t have enough money to make a substantial down payment. Typically, lenders don’t like to grant loans for more than 80% of the price of a home. Lending so much money to a borrower is risky, so banks who do so will require that the buyers purchase private mortgage insurance (PMI). Mortgage insurance is expensive, so borrowers try to avoid it by applying for two separate mortgage loans. The first loan granted is usually for a maximum of 80% of the purchase price, while the second mortgage covers the remaining cost of the home – typically around 20%.

Who can get a second mortgage?

In order to be approved for a second mortgage (also referred to as an 80/20 loan), you must have a very good credit rating. Because you won’t be making any down payment, you are a higher risk to your lenders. A high credit score (above 700) puts lenders at ease, knowing that you have a solid credit history.

What happens to a second mortgage after foreclosure?

Even well-qualified buyers can experience foreclosure. As they say, “Life happens,” and a variety of factors may cause you to become unable to continue making your monthly mortgage payments even if you had great credit when you bought your home. For example, you may have experienced:

  • Divorce
  • Chronic illness
  • Accident or injury that permanently reduced your earning potential
  • Job loss
  • Unforeseen expenses (death or disability of a close relative, job transfer, etc)

Upon foreclosure of your home, your primary mortgage lender (80%) will sell your home at Sheriff’s Sale/Foreclosure Sale in order to recoup at least some of the money you borrowed but were unable to repay. Any sale proceeds that exceed what you owed your primary lender will be used to pay back your second mortgage lender.

Home sold at foreclosure sale almost always sell for less than they are worth. This means that second mortgage lenders often don’t see any proceeds from foreclosure sales. The second lender is left holding the (empty) bag, as the saying goes.

Will I have to repay the second mortgage if the foreclosure sale price is below market value?

Naturally, this is a pressing question for homeowners who’ve lost their homes to foreclosure. No one decides to go through foreclosure because they have plenty of money floating around. If you’ve lost a home to foreclosure, you’re understandably concerned about the potential of a deficiency judgment.

A deficiency judgment is a legal action that a lender can take against you for the amount of money they lost when your home was sold at Sheriff’s Sale. Many lenders will write off the loss due to the cost and hassle of mounting a legal action. However, some lenders do indeed pursue a lawsuit against defaulted borrowers whose homes were sold at foreclosure for less than the amount still owed.

How can I repay my second mortgage? I’m already in financial distress!

If your second mortgage lender has threatened you with legal action unless you pay up, you need to be proactive by retaining counsel. You can file for bankruptcy, which will automatically prohibit ALL of your creditors from attempting to collect money from you. Your NJ bankruptcy attorney can also take other action to settle your second mortgage debt if you wish to avoid chapter 7 bankruptcy.

Image credit: Chris Potter

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