If someone defaults on their mortgage loan, what happens to the second mortgage owed?
Question by Nancy C: If someone defaults on their mortgage loan, what happens to the second mortgage owed?
I know someone defaulting on their mortgage loan because they decided it is too much owed for a house that has gone down in value 40%. They also have a second loan for $ 75,000. Is that forgiven too? Are there different rules for second loans? These people have assets. Own another property paid in cash plus money in the bank.
Best answer:
Answer by Brieanne
The bank will foreclose on the loan, and they will lose the house. The bank will sell it for whatever they can get for it. If they have assets, the bank can go after them for the difference between what was owed and the actual selling price, plus all the court costs and attorney fees, which could be tens of thousands on top of the difference (called a deficiency judgment).
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Filed under: Second Mortgage Loan
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answer depends on state law.
usually, the owners will receive bills from the second mortgage company for the amount unpaid — such loans are backed by BOTH the property and the full faith and credit of the borrower.
consult a local RE attorney for full detains in your state.
The bank can sue and force sale of their other home to make up the difference.
Loans against a house is secured by the deed of trust on the home only. Collateral was based on the equity of the home at the time when the loan was given. Banks do not go after other assests in the event of a foreclosure nor do they turn it over to a collection company to collect any other outstanding amounts. The lender writes it off as a loss and thats the end of it.
Some lenders when writing risky loans will sometimes tie up other homes owned by the borrower in case of a default. These things are decided up front.
You are getting goofy responses to your question here. I’d challenge them to produce an instance when a lender went after other assets upon a foreclosure of a residential property.
While I’ve seen banks go after other assets when it comes to business loans or personal loans, I’ve never seen it happen on a residential property secured by a deed of trust.
BTW……in addition to checking with your attorney, check with your accountant for tax implications. You’ll receive a 1099 for what the bank is unable to recover.
This could get ugly for them. Depending on the state, the difference on first and second may not be forgiven, and lenders are looking for loopholes in non-recourse states to collect, I suspect there are bad surprises coming down the road for those people. Anyhoo, the lender will most likely discover the other assets and lien them. Lenders are not just walking away from these debts now, and sometimes sell their bad paper to very aggressive agencies that pursue their investment hard.
This is not going to be pretty for those engaging in “convenience foreclosures” – big storms are coming.
YES!!!!!!!!! there are different rules for first and 2nd mortgages. And they MAY still be on the hook for the 1st. It depends on the type of mortgage, the state it’s in and what the purpose of the loan was for (ie purchase or refinance).
In addition, even if the 2nd mortgage forgives the debt, it will still be on the credit AND!!!!!!!! the IRS will tax them on the bank loss.
They need to talk with a lawyer. You can’t just walk away!!
When the borrower defaults, the first mortgage holder forecloses and sells the property. If they do not sell it for enough to pay off the first mortgage, then the second mortgage gets nothing. Depending on state law, the second mortgage holder may have the right to sue the borrower for whatever part of the $ 75,000 is not paid. So the borrower could be forced into bankruptcy.
If this was my client I would advise them to speak to an attorney. This could be a situation that comes back to haunt them later. They need to understand the legal aspects of just walking away.