Like most homeowners, you probably already know the repercussions of failing to pay your mortgage: Your bank or lending instruction can foreclose on the property. Many homeowners use the equity in their home as collateral against a loan. This is called a second mortgage, and there are severe penalties associated with not paying it back.
Basics on Liens
When you first purchased your home, you likely covered the cost with a mortgage. The mortgage lender used the property as collateral, which means that the lender has the right to seize the property back for nonpayment. This security is called a lien, and is a legal right of ownership to the property that stays in place until the debt is settled. Likewise, when you take out a second mortgage or home equity line of credit, the lender for that loan also places a lien on the property. This means that two lenders have ownership rights to the home.
When a home is foreclosed, it is usually because the owners have not paid their primary mortgage. In a foreclosure, there is a legal sequence in which all liens on the property must be paid. Any unpaid property taxes always take precedence over other liens, but your first mortgage has priority over a secondary mortgage. This means that your first mortgage will be paid off with the proceeds of the foreclosure sale before your second or subsequent mortgages are paid. But if your primary mortgage is in good standing and your secondary is not, you could still face a foreclosure.
Secondary Mortgage Foreclosure
Even if your first mortgage is in good standing and you do not have unpaid tax debt, the lender holding your second mortgage can foreclose on the property for nonpayment. This works like a traditional foreclosure, with lien priority setting the schedule of debt payment. This means that, even if the secondary lender is bringing the foreclosure suit, the primary lender will be paid first. Any unpaid tax debt will also be settled ahead of both mortgages. Therefore, it’s possible that a secondary mortgage lender could foreclose on a property and still not receive payment.
Since a foreclosure sale may not bring the proceeds necessary to settle all the liens on a property, it’s possibly that your secondary mortgage -- along with other lower-priority liens -- may not be settled. While a foreclosure legally removes the lien on the property, it may not erase the unpaid debt. If your secondary mortgage lender or other lien holder does not receive the funds necessary, it could bring a lawsuit against you for the unpaid debt.
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