A first foreclosure is simple and there are few surprises, if no other mortgage liens against the property. When another creditor is added, that makes the foreclosure process more complicated. There are many things that can happen with a second mortgage in foreclosure, depending on the borrower’s circumstances.
Background: lien position
When a property has mortgage encumbrances placed upon each charge has a certain position, depending on the order in which mortgages are presented. For example, the mortgage is filed first in first position. The next creditor is in second position, and commonly called second mortgage. If the first mortgage is paid off, the second mortgage is moved to the first position and a third mortgage, if any, moves to the second. The position indicates the order in which mortgages are paid when you sell the house.
Running first mortgage
If you are behind on payments of the first mortgage company, eventually will start foreclosure. As the foreclosure process near the end, the property is sold. When the first mortgage holder sells the property receives the proceeds of the sale, leaving any excess of the balance due of the first hands of the second mortgagee. Once all mortgages have been paid for selling any product that has been going to the borrower, but that is rare. If the property is worth less than the value of the first mortgage, Second Mortgage Company receives nothing.
Running second mortgage
The holder of the second mortgage can foreclose on a house as the holder of the first mortgage. If there is enough capital, both the first and the second mortgage is paid. Even if it is not enough to pay off the second mortgage, many holders of the second mortgage can still foreclose because they can get some money in the sale.
If the value of the property is less than the balance of the first mortgage, there is no reason that the holder of the second mortgage foreclosure do. It would receive nothing and, in this case, the holder of the second mortgage is essentially no collateral.
Chapter 13 Bankruptcy
If your home is in foreclosure, and want to try to keep, you can use Chapter 13 bankruptcy. Chapter 13 stops the activity proceeds immediately, stopping the foreclosure until you can reach a payment agreement with the mortgage company. If you have a second mortgage that is fully guaranteed by the value of the house will have to pay the mortgage as well, although part of the payment can be modified in bankruptcy. If your second mortgage is partially guaranteed, the bankruptcy judge may reduce the second mortgage balance to the amount that is guaranteed by the house. If the house is on the level, and even the first mortgage is not fully guaranteed, the bankruptcy judge may completely eliminate the second lien.