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Stop paying second mortgage - What happens next?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 17th Sep, 2008 12:30am
If you're in financial hardship and you're not paying second mortgage for 150-180 days from the due date, the lender may foreclose your property or file a lawsuit and seize your personal assets. Read through the section below and find out what happens if you stop paying second mortgage.

What happens if I stop paying second mortgage?

If you're not paying your second mortgage, and your home is upside down (combined balance on 1st and 2nd loan exceeds the home value), the lender may not file a foreclosure. That's because he'll have to pay off the first loan before he intends to retrieve the money he has invested on the 2nd loan.

However, even if the second lender forecloses and sells the home for less than the balance on 1st and 2nd loans, the law may not require you to pay the difference or deficiency balance provided the second mortgage is a non-recourse loan. Moreover, certain states have anti-deficiency laws which prevent one from paying the deficient amount provided the second mortgage (such as the 20% of an 80/20 loan) is used to purchase a primary residence.

However, if the second mortgage is a recourse loan, and your state doesn't follow the anti-deficiency laws, the deficiency balance needs to be paid off. In case you don't pay the deficiency or if the lender doesn't foreclose at all, here's what may happen:

  • Judgment/garnishment: The lender may file a lawsuit in the local court and get a judgment order to collect the unpaid balance. He can come after your assets such as bank account funds. The lender may have your wages garnished. Wage garnishment is a legal process in which an individual's earnings are partly or wholly withheld by the employer (as per court order) for repayment of debt.

  • Charge-off: The lender may issue a second mortgage charge off and assign or sell off your debt to a collection agency (CA). The agency will then try to collect the loan payments by all means. If you don't make any payment, here's what the CA can do:

    1. Harassing calls/letters: The collection agency is likely to harass you with repeated phone calls or payment notices/letters. They may even call you at odd hours and disturb you at your workplace, though such practices are against the Fair Debt Collection Practices Act (law which governs the practices of CAs).

    2. CA may file lawsuit: The CA may even sue you thereby leading you to legal hassles. They may even get a judgment order from the court and go for wage garnishment or seize your bank accounts.

      However, if your second mortgage debt is well past the Statute of Limitation (SOL), the collection agency cannot file a lawsuit. Even if they threaten to sue you after the SOL is over, send a cease and desist letter stating that your debt has crossed the SOL, so they shouldn't contact you any more. Still if they harass you for payments, file a complaint with the FTC or State Attorney General.

What to do if I can't pay second loan

Once your home is sold off at a foreclosure auction, the second mortgage debt or the deficiency balance on it will be considered as an unsecured loan which you can pay off in monthly installments. In case you can't afford to pay the deficiency balance in full, you may negotiate a settlement with the lender or the collection agency to whom the lender may have assigned/sold off your debt.

Paying your second mortgage will help you minimize the chances of getting hit with negative remarks on your credit report. You can thus avoid trashing your credit score and improve your chances of getting loans in future.
Posted on: 17th Sep, 2008 12:30 am
i have a 1st & 2nd mtg and i have requested a short sale. i am able to make my 1st mtg payment but i do not have the funds to make my 2nd mtg pymt. if i stop paying second mortgage what happens? can the 2nd lender foreclose on my house? and if not, what happens to the 2nd loan? if they charge off & put a lien on my house, then i will never be able to sale it because i owe more than the house it worth? any advice? also, if they charge off & put a lien on my house, can i then bk it?
Welcome Guest,

The second lender can foreclose on your property. But it will have to pay off the balance on the first loan and then any remaining amount can go towards the second.

If you are not able to pay off the second loan, the lender may either issue a charge off which implies that he has decided not to collect on your loan.
Posted on: 17th Sep, 2008 12:44 am
Hi Guest,

Welcome to Forums!

By charging off your loan, the lender decides the he will not collect your loan. Rather he has sold of your loans to a collection agency who will inturn collect the loan from you.

Feel free to ask if you have further queries.

Posted on: 27th Sep, 2008 12:31 am
I'm not paying second mortgage since a year and as smithsussane said: the lender decided not to collect my loan and referred my loan to a collection agency. Recently they started calling me, yet the only offer they got for me was to set my checking account so they can take "a minimum payment" from there so, the lien won't keep reflecting on my credit. I told them "no." I said that I wanted something more concrete like a modification loan that can actually guaranteed something on their behalf.
Posted on: 04th Nov, 2008 08:12 pm
Hi Virgilio!

As far as I know, the collection agency will not be able to give you a loan modification. They can only collect the dues from the debtors. Its better you pay off the dues because there have been several instances where people have been harassed by the collection agency. They may even double the charges if you do not pay the dues.


Posted on: 05th Nov, 2008 12:34 am
wow, as usual.

a second loan is already a lien on the property. the collection agency need not place a lien, as one already exists for the debt being discussed.

that lien will need to be paid in full upon sale of the home, unless you make some sort of arrangement to pay less than the total due.

jerry..."they may even double the charges if you do not pay the dues"???????? what are you referring to? there is legality involved here. no collection agent can "double" charges without a legal basis to do so; and "if you do not pay" is not a legal basis for such doubling.

i find it quite unusual that a second lender would engage a collection agency in order to collect its balance. they have every right to bring a foreclosure action to recoup their funds.
Posted on: 05th Nov, 2008 02:00 pm
If you owe more than your home is worth. Lets use this as an example: You have 460,000 on your 1st and 90,000 on a second. Your home is approximately worth in todays market...250,000 but you owe 550,000. The 2nd can't foreclose on your home because they would have to pay off the 1st to recoup any money. Thats not possible, they wouldn't pay 200,000 to your 1st and collect nothing for themselves. That is why perhaps it was sent to a collection agency. I think it would be stupid to keep paying on a 2nd if you are so upside down. Also keep in mind the 2nd was based on the appraisal that you had when you took your 2nd out. If that money isn't there anymore then they have nothing for collateral (meaning home is not worth as much). They can scare you all they want, waste phone calls whatever, but they WON'T foreclose on your home in todays market. No way No How. If they do, they are retarded.
Posted on: 11th Dec, 2008 09:47 am
Interestin because I am in a similar situation where my house is worth about the same as my first home loan(250,000). I have a 2nd for 125,000. I've heard of people filing bk on the second and staying in the house. I really don't have any other debt other than small car payment and small balance on cc. Rather than pay lawyer for BK work, should i stop paying my second mortgage? They would lose money if they foreclosed right now. By the way the 2nd was a refi of the original heloc and i took it out for more $. Both 1st and second are interest only. I went from making 80,000 to 45,000 a year recently and something's got to give.
Any advice?
Posted on: 15th Dec, 2008 07:04 pm
Posted on: 16th Dec, 2008 02:36 am
hello all

our situation is just like "pacifico"

we have a 1st & 2nd

1st is interest only, 2nd is normal but higher % rate

first off, this is our first home

they added an addendum to our home loan papers at the last second totally messing up our written good faith estimate.

we have made our payments on time for the past 3 yrs-plus paid extra whenever we could!!!

my husband just had his wages cut

we can no longer make our 2nd loan payment - funny how the lender calls immediately when they want their money but haven't listened to us for the past 2 yrs when we've tried to get them to refinance us and get rid of our arm before husbands wages were cut!

these companies do not even get a real person to call us!
it says press 1 if you are so and so, press 2 if you are not
not even identifying themselves

for 3 years we have given them our money, we deserve better than this!
this is american home mtg servicing and homeq

stay far far far away from them!

they are in india!!!

po box address and toll free number - horrible, nasty, pathetic and no customer service!
Posted on: 21st Dec, 2008 06:49 pm
Hi alliblake,

I can understand how frustrated you must be feeling. Check out with your lender the options of loan modification or forbearance. In loan modifications, the lender will give you an alternative repayment plan to pay off the debts. In case of forbearance, the lender will either suspend or reduced your payments depending on your situation. You can also refer to link given by me in the earlier post where you can find various options to avoid foreclosure.


Posted on: 22nd Dec, 2008 12:22 am
Thank you for your response Jerry, it is truly appreciated However, in our case this won''t help Realizing after, I did not mention that we also had a 5 yr arm, presently up in April/May 2010.

Therefore, this house would not even come close to what we paid (still upside down) when its time to refinance Therefore, we would be really stupid we feel not to just let ourselves go bankrupt doing a 13 in order to get rid of the 2nd loan. We do not quality for a 7

This is truly a very sad situation. These companies would rather us do this than work with us after we have proven ourselves for 3 solid years without missing a payment plus making extra payments This will lead our house to be empty, uncared for, and them getting next to nothing for it in the long run

We tried asking them to sell it back to us at the actual appraisal value now so that we would not lose our house. They would not do it They have left us no choice.

We are not willing to throw away our money over another year and a half for a house that will still not be worth the value paid by the time the arm is up and refinancing will be impossible. At what time do we cut our losses? Especially when we do not know if my husbands wages will be reinstated We have seen houses around us going to less than half of ours now... the same size, rooms, baths, lot size etc
Posted on: 22nd Dec, 2008 01:44 am
You don't have to refincance after the ARm resets, what are the reset terms (how is it calculated)? It may reset lower than it is now given the current rates. If my ARM reset now, it would go more than 2% >down<.

The 5 year terms is just the amount of time that it won't reset, it's still a 30 year loan.

In my case, the ARM reset rate is the current (on the rest date) 1 week average of the 1year tbill, plus a 2.75% margin (the banks profit). Since the 1 year tbill is under 1%, I'd reset at >1% + 2.75% = >3.75% if it reset today. I would go from my current 5.75% down to 3.75%.

Mine is also due to reset in May 2010, but I'm not holding my breath that the rates will be so low then. You should find out what your terms are, you may be able to ride it out that reset if rates remian low, long enough to get back on your feet.
Posted on: 22nd Dec, 2008 09:17 am
Hello Chad

Thank you for your replied post

Even if we stayed on the present terms, this house is still upside down, we still have our wages cut

It would be inevitable that the 2nd mtg company will come after us?

They have been calling everyday yet do not identify themselves!
We know its them-its says press 1 if you are so and so, press 2 if you are not. We refuse to talk to a machine. Its rediculous

Irregardless, we cannot make the 2nd loan payment right now.

We saw a bankruptcy attorney to see where we stood.

He said if we claimed the 13 the 2nd lender cannot collect as there is no equity to collect on-it would be written off essentially. However, you cannot pay off the repayment plan on the 13 prior to 5 yrs or the 2nd lender can come back to try to recollect if you are making more money at that time

We do not wish to claim bankruptcy, so are hoping we can do a loan modification - however, our mtg company (1st) has been impossible to talk to. They outright said they do NOT do that. They said they could possibly lower the interest rate. I started laughing. That will be good for NOT much! It wouldnt help us

The 2nd lender when contacted a year ago said they cannot do anything without the 1st company doing something.

Therefore, we sit back right now and wait

Until they give us a real person to talk to...
Posted on: 22nd Dec, 2008 12:12 pm
Hi alliblake

As far as I can understand your situation, you will have to speak to the lender. You have mentioned that you do not want to go for the option of bankruptcy. So you can check out the options of either a short sale or a deed in lieu foreclosure. However, the lender will be ready to accept any of these two options only if you are past due on your home loan payments. Moreover, you should also remember that you should opt for any of these options if you can afford to lose the property.

However, you should note that it will totally be the lender's discretion whether he will accept a deed in lieu or a short sale.

Posted on: 23rd Dec, 2008 12:55 am
Hello Niicss

Thank you for the great information!

We have a second mortgage, if we are understanding correctly after reading SHORT SALE, if you have a SECOND MORTGAGE we do not qualify?

Its beginning to sound like we can only try the DEED IN LIEU or the BANKRUPTCY?

We have a first and second

Our house is probably only worth the FIRST (254,000.00) according to online resource-our first is at approx. 267,000.00. The second is over 80,000.00

) ;

This was our first ever home purchase, and at this point, probably our last.
Posted on: 23rd Dec, 2008 05:24 pm
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