By: Jeena Cho
A very common situation I come across is where the client is struggling to make all of her payments, including mortgage, car, credit card, and living expenses. So, a question that comes up frequently is what happens when I stop paying my mortgage? The answer depends on if you stop paying on your first or second mortgage.
Defaulting on the first mortgage
Let’s suppose that you’re delinquent on the first mortgage. Typically, after 3 – 6 months of missing payments, the lender will send you a Notice of Default. This puts you on notice that you are delinquent and that the lender intends to accelerate the terms of the note. Meaning, instead of making your normal monthly payment of say $3,000, the bank is demanding the full loan amount.
This is the time where you need to have the hard conversation and ask yourself “can I really afford to keep this home?” In my experience, many people have other debts aside from the mortgage, such as credit card payments. Oftentimes, if the client didn’t have the other debt, he or she would in fact be able to make the mortgage payments.
After the Notice of Default, you’re typically given about 3 – 6 months before the lender sends you a Notice of Trustee’s Sale. This is where the lender tells you the date and time of when your home will be sold off. Note that it may take the lender a lot longer than 3 – 6 months before sending you the Notice of Trustee Sale. I’ve seen many clients who are delinquent on their mortgage who still has not received the notice after 12 months.
The Trustee Sale has a minimum notice of 21 days. On the foreclosure date, your home may be auctioned off. I say may because I’ve seen situations where the bank will either cancel the auction date or the home isn’t sold on that date for various reasons. Of course, there’s also the possibility that your home will be auctioned off on that date. After the auction date, if you’re still living in the property, the bank can proceed with its eviction process.
Defaulting on the second mortgage
Many people purchased their home by taking out an 80/20 loan or have pulled equity out of the home later. In this situation, you have both a first and a second lien. So, the next common question I get is “what if I’m current on my first mortgage but missed my second mortgage?”
The answer to that question really turns on what if anything the second mortgage lender would get if it initiated the foreclosure. It’s important to note that regardless of which lender initiates the foreclosure – first or second, the first mortgage will always get paid first. The second mortgage may initiate the foreclosure and get nothing from the transaction. As a practical matter, unless you have equity in your home (e.g., your combined mortgage is $500,000 but the fair market value is $550,000), it is unlikely that the second mortgage will initiate the foreclosure.
What I have seen in my experience is that after some period of delinquency, the second mortgage company will sell the debt to a third party debt collection agency. The third party debt collection agency will then attempt to collect the debt from you. It may be possible to settle your second mortgage for less than what you owe on it.
Please note that foreclosure process varies widely by State. The above information is based on California law.
[blog_consultation]
