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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?
Hi michael

You can contact your second lender and negotiate with him so that he gives you a repayment plan so that you can save the property and also pay off the dues. You should definitely explain your hardship to the second lender.

Posted on: 29th Jun, 2009 01:59 am
I was living in a small town in fl and my job was moved to a larger city two hours drive away. Was commuting for three years and then go tired of driving and decided to buy a house in that larger city. In the smaller city a have a house worth less than the current value around 100000 less of it and also have a line of credit of about 100000. Bought this new house a couple of weeks ago and although I still can make the payments for the three loans it is very hard for me to do it. I have never been late with my payments in the house in the smaller town or the line of credit and can not sell the house because it is worth less than my currents mortgages. what are my options as far as trying to pay less every month or try to get rid of my second mortgage in the house in the smaller town and the line of credit as well?
Posted on: 06th Jul, 2009 08:32 pm
Hi filapere,

Your query has been answered in the given link:

Please take a look at it. I hope it'll help you.

Take care.
Posted on: 07th Jul, 2009 03:40 am
Hello, I bought a home in CA in 05 and lived there until 08, then rented the house out for a loss and bought another home. I owe 344k on the home and the comps are around 260k. I am hoping for a short sale and if not, a foreclosure. There will be a deficiency. I have around 80k in equity in my new home/primary res in VA? What can they do regarding the deficiency? There is no second, only a first? Can they take my primary home, or put a lien on it? As I said, the home I am losing is in CA. Nothing is late yet, so of course, the bank won'( talk to me.
Posted on: 10th Jul, 2009 10:15 am
Hi Guest,

Your lender can definitely put a lien on the primary property on which you have equity. As you are not late on the payments, the lender is not talking to you regarding that property. Generally lender would short sale the property if you are late on your mortgage payments. It would be better if you could list the property in the market and check out if you can get buyers for the property.

Posted on: 12th Jul, 2009 08:45 pm
I had bk on feb 2008 I have been paying both 1st and 2nd morgage the 1st is for 178,000 the second for 45,000 the house is worth 140,000 now.I just ran my credit report and it says my second was 00 out at the bk 17 months ago and no record of payments.I called the company and they said they can forclose if I don't make the payments.I think I should have stop paying at the bk.Do you think I should pay them more money or try to get the money back I paid after the bk? what should I do? :roll:
Posted on: 25th Jul, 2009 09:50 am
Hi I see that many people are in my situation. I had a partner who I purchased this home with. She decided after 5 years she wanted to leave so now I am faced with Forclosure. I have a 1st and 2nd also and have tried to modify my loans but it is still not enough. I don't want to walk away but have no choice. I have been looking for an apartment to live but not sure what will happen if I just leave.
Posted on: 26th Jul, 2009 08:39 am

to pw,

which chapter of bankruptcy did you file - chapter 13 or chapter 7? did you reaffirm your mortgage if you filed for chapter 7 bankruptcy? if you are making the mortgage payments regularly, you must have documents related to that. you should show that to your lender as well as the credit bureau and clear off the whole issue.

hi carmen,

if you just leave the property, the lender will foreclose it and your credit score will get badly effected. in my opinion, you should speak to the lender about a deed in lieu. this will help you in selling off the property. moreover, you will not be responsible for the deficient amount resulting from the sale of the property. however, your credit score will get reduced by 250 points. once the deed in lieu is complete, you can rent a house for 2-3 years, build your credit and then try purchasing a new property.
Posted on: 26th Jul, 2009 10:52 pm
my first mortgage is 120,000 and my second mortgage is 9,000 i put my home in short sale do i have to pay my second mortgage help me please
Posted on: 30th Jul, 2009 01:05 pm
Hi toum!

Welcome to forums!

Though your property goes for a short sale, you would be liable for the second mortgage. The second lender will have the rights to sue you for the deficient amount resulting from the sale of the property. If you are unable to pay the second mortgage dues, the lender may charge off the loan to a collection agency.

Feel free to ask if you've further queries.

Posted on: 30th Jul, 2009 08:29 pm
The 2nd mortgage becomes an 'unsecured' debt - that is why the balance is sent to a collection agency. If you file bankruptcy there is the possibility to strip the 2nd. If the house is worth less than the 1st loan the 2nd is not able to foreclose.
Posted on: 14th Aug, 2009 12:48 pm
If I stop making payments to my second, will it automaticly eventually go to a collection agency which can then be taken off in chapter 7?
Posted on: 04th Sep, 2009 05:15 pm
Hi Chris!

Welcome to forums!

If you stop making payments on your second mortgage, it would depend upon your second lender whether he would send it to a collection agency or place a lien on your property. You need to contact your lender and inform about your hardship. The lender may give you some options to clear off the dues.

Feel free to ask if you've further queries.

Posted on: 06th Sep, 2009 09:11 pm
The secodn lender can do foreclose on the property, but most of the time they may not do that becuase thye may not get anything

So there is good possibility that they can send it to collection agency or they may charge off
Posted on: 26th Sep, 2009 09:06 pm
I filed bankruptcy in California for my first and my second....I was able to re-affirm my 1st by finally modifying it with the mortgage company. Now the company holding my 2nd says I need to start paying on it....but it was included in my bankruptcy filing which I thought wiped out this debt. I'm upside down by 150,000 on my 1st mortgage and my second is for 30,000. Here are my 3 questions: Am I responsible to pay this? If I don't, will it be added as income on my taxes? Can the mortgage company for my 2nd foreclose on my home if I am current on my 1st?
Posted on: 06th Oct, 2009 04:43 pm
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