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How to Avoid Defaulting on Your Second Mortgage

How to Avoid Defaulting on Your Second Mortgage

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As a short-term interest-only loan taken out with the available equity in your property, a second mortgage is typically only offered by private lenders, and unfortunately, their rates are higher than those you’d see for first mortgages at a bank. Default on your second mortgage, and you could experience foreclosure of your home, or even face a lawsuit; the consequences can be devastating, but seeking help from a reputable, local broker can help you negotiate a settlement.

Paying your second mortgage is the only way to avoid defaulting on it, but realistically, this is never easy, and many people end up defaulting through no fault of their own. So, if you do end up defaulting, what could happen and what can you do to minimize the damage?

Foreclosure dependent on your home’s equity

If the value of your home is greater than the amount left to pay on your mortgage, then you have equity, and the more you have, the greater the possibility that the lender of your second mortgage will try to foreclose your home should you default.

If your home is ‘underwater’, you could be spared

If the amount left to pay on your mortgage is less than your home’s value, your home is classed as underwater, and your second mortgage lender is typically less likely to foreclose your home in the event that you default.

Negotiate a settlement

This is made much easier if you have a professional broker on your side, and they can help you avoid the power sale of your home, or even being sued personally if the proceeds from the sale aren’t enough to cover the loan cost.

What happens to your first mortgage if you default?

Your second mortgage lender can still foreclose your home if you default, even if you’re continuing to make payments on your first mortgage. If your home is sold under power of sale, the profits will go to each lender in order of priority.

Could you be at risk of a lawsuit?

Irrespective of whether your second mortgage lender opts to foreclose your home or initiate a power of sale on the property, you could still be at risk of a lawsuit. This makes it even more important to consult with a professional mortgage broker to try and negotiate a settlement.

What about paying off some of the debt?

Some lenders may be willing to accept a lump sum payment that’s worth less than the amount you owe them, or even forgive some of the added penalty and fees that accumulate while defaulting, but it will depend upon how much you have left to pay on your mortgage.

Listing your home for a short sale

A short sale is when your home is listed for less than the amount left to pay on your mortgage and doing this can help you recover some of the leftover debt that you owe lenders.

The importance of working with a mortgage broker

If you work closely with a local mortgage broker, you can negotiate a better deal if you default on your second mortgage and avoid some of the damaging consequences.

If you’d like more advice about whether a second mortgage is a smart idea, or need help with a recent second mortgage default, reach out to a local mortgage broker at the earliest opportunity.



07 dSep, 2021

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