Two questions clients commonly ask me are:
- - What happens if I stop paying on my second mortgage?
- - What happens if I stop paying my mortgage (first and second?)
If you are delinquent on your first mortgage, soon or later, your mortgage company will initiate a foreclosure process. How long you can live in your home after you stop paying your mortgage varies greatly from lender to lender, your geographical location and other factors. I’ve seen clients not receive the Notice of Sale (this is the notice letting you know the location, time and date when your home will be sold) for years in certain cases. I suspect that as housing prices recover, especially in the San Francisco Bay Area, banks won’t wait around as long to foreclose.
What happens if I stop paying on the second mortgage? Second Mortgage Can Initiate Foreclosure!
Some clients mistakenly believe that only the first mortgage can foreclose on the property. Not so! Both the first and the second mortgage can foreclose if you miss payments. However, even if the second mortgage forecloses, it will only get paid after the first mortgage.
Let’s take an example:
You have two mortgages on your home with the following balances:
1st: $700,000
2nd: $100,000
Now, let’s suppose the second initiates the foreclosure and your home sells at auction for $600,000. The second lender will get nothing because the first mortgage is first in line to get paid. Since the sale price wasn’t sufficient to cover the first mortgage, the second gets $0. For this reason, it is less likely that the second mortgage will foreclose if your home is underwater.
However, let’s suppose your home is worth $900,000. In this case, the second is a lot more likely to foreclose since it would recover all of its money.
Can Chapter 13 Get Rid of Second Mortgage?
Chapter 13 is a viable way to save a home in many foreclosure situations. In Chapter 13, you propose a Chapter 13 plan where you repay your mortgage arrearages (missed payments) over up to a five year period. For example, if you owe $30,000 in back mortgage payments, you would propose to repay $500 per month ($30,000/60 months) in order to get caught up on your mortgage.
Chapter 13 may also allow you to get rid of your second mortgage once and for all through a process known as “lien strip.” Chapter 13 lien strip is only allowed in the following situation:
Your second mortgage is unsecured. In general, this means that the fair market value of your home is worth less than the first mortgage balance. For example, your home is worth $500,000 and your first mortgage balance is $650,000. This would make your second mortgage “unsecured” no matter how much your second mortgage loan amount because the first mortgage absorbs all value and leaves nothing for the second.
In this situation, we can file a Motion to “strip” your second mortgage. In order to do the lien strip, you must a) file Chapter 13 (not a Chapter 7) and b) make all of your Chapter 13 plan payments. In general, a Chapter 13 plan will last for 3 or 5 years.
As the housing prices continue to rise in San Francisco Bay Area, it will certainly become harder to lien strip since more second mortgages will be secured. In order to strip the second mortgage, the entire second mortgage balance must be unsecured. So, if you owe $600,000 on your first mortgage and your home is worth $600,001, you’re out of luck.
Of course, valuing your home to the exact dollar is difficult, especially in this market but that’s a topic for another post.
Image Credit: 401(K)2012
