If you’ve got two mortgages and are falling behind on payments, you’ll want to educate yourself on how mortgages and foreclosures affect your overall credit and borrowing situation.

Understanding First and Second Mortgages

A first mortgage is the original mortgage taken out when a buyer purchases a home. The second mortgage is an additional loan taken out on the home, using the home as collateral. If you’ve got two (or more) loans out on your home and are now facing financial difficulties, you’ll want to get help before you end up in a precarious situation.

What Happens to my Second Mortgage if my First Mortgage Forecloses?

If the lender who owns your first mortgage initiates a foreclosure, the first mortgage will be satisfied by the proceeds from the sale as best as possible, and the second mortgage will be satisfied if there is any money left over. In many cases, there isn’t any money left to satisfy the second mortgage after a foreclosure. The lender who owns the second mortgage is still going to want to get paid, so you’ll need to watch out.

The Danger of Falling Behind on a Second Mortgage

Many people think they’ll still be able to keep their home if they stay current on the first mortgage but neglect the second mortgage. Unfortunately, this is not a safe financial strategy, and many well-meaning home owners have been duped by this misconception.

What Happens to my First Mortgage if my Second Mortgage Forecloses?

If you are delinquent on your second mortgage, but you have made all your payments on your first mortgage, the lender who holds your second mortgage has several options available, including foreclosing on the house. If the lender who owns your second mortgage initiates a foreclosure on your home, you can ask the lender who owns your first mortgage to consider buying up the second mortgage, and refinancing such as to roll your second mortgage into the first, combining the debt and placing all the risk on the first lender. In either case, once the house is in foreclosure status, the first mortgage will be satisfied first, and the second mortgage satisfied second, regardless of who initiated the foreclosure.

What if The Second Mortgage is With a Different Lender Than the First Mortgage?

This is another misconception many borrowers have. You may think your first mortgage is safe if you default on the second mortgage just because the second mortgage is owned by a different lender, but really, it doesn’t matter if the loans are with the same lender or not. If you are delinquent on payments to your second mortgage, your first mortgage (and home ownership overall) are in jeopardy, no matter who owns what loan.

What Can a Lender do if the Foreclosure Proceeds do Not Look Like They Will Satisfy the Second Mortgage?

The lender who owns or owned the second mortgage can take the following action to collect on the deficiency balance:

• Buy the property when it up for sale and then try to flip the house as an unconventional way to try to recoup losses
• Buy out the loan from the first lender
• Take you to court and file what’s called a “deficiency judgment” lawsuit against you
• Take you to court and file a civil judgment lawsuit against you

Reasons Why Your Lender Might Not Foreclose

If you are indeed current on your first mortgage, the lender on your second mortgage may very well be willing to work something out with you, especially if you have good credit and can show something out of the ordinary has happened that can be remedied in the near future. This is because lenders who own second mortgages usually end up losing money on a foreclosure, so they only foreclose if they feel there is no possibility of an economically beneficial arrangement that can be made with the buyer.

The lender who owns the second mortgage may choose to do any of the following:

• Refinance your second mortgage to work out an affordable payment plan
• Offer you a temporary forbearance, and then allow you to resume payments as usual after the forbearance
• Release the lien on the home (the second mortgage) for a settlement and charge off, without forcing you to sell the home
• Agree to a short sale

Options to Investigate if Your Second Mortgage is at Risk of Foreclosure

You may benefit from the Making Home Affordable Refinance Program how to consolidate and pay down debt.

You may be in a situation where declaring bankruptcy is your best option, but that is not a decision to be taken lightly. If you are interested in evaluating whether bankruptcy would be a good option for you, check out this expert website discussing bankruptcy options.

In any case, you will want to communicate with your lenders, explaining your situation and pleading your case. In most cases, lenders will start off hard line, saying you have to pay or else. However, if you persevere and make it clear that you are willing to work something out if they’ll work with you, there’s a good chance you’ll negotiate something that works for all parties involved. If you don’t communicate with your lenders, you will make it much less likely that they will act in you favor.