Can a bank foreclose on you if you are delinquent on our second mortgage? What are our refinance options?
Any lender that holds a loan secured by a property, including a second mortgage lender, can foreclose on the property if you do not comply with the terms of the loan. If the second mortgage lender initiates the foreclosure process then the first mortgage lender usually also forecloses on the property to protect its interest, even if you are not technically delinquent or in default on the first mortgage.
Most first mortgages contain an acceleration clause that enables the lender to demand the immediate repayment of the outstanding loan balance if another lender forecloses on the property. In short, in this context the acceleration clause enables the first mortgage lender to foreclose on the property to ensure that it recovers its outstanding loan balance before the second mortgage lender does.
If you are delinquent or default on a second mortgage, the lender usually only forecloses if it is confident it can recover its loan. The lender compares the first and second mortgage balances to the estimated property value to assess the likelihood that the lender can be repaid with the proceeds from selling the home.
For example, if a property valued at $200,000 has a first mortgage with a balance of $210,000 and the second mortgage with a balance is $30,000, the second mortgage lender is unlikely to foreclose because it cannot recover its outstanding loan amount. If the same property has a $150,000 first mortgage and a $30,000 second mortgage, the lender may be more willing to start the foreclosure process because it is likely to recoup its loan even after the first mortgage lender is paid off in full.
Being delinquent on your second mortgage and possible facing foreclosure creates significant challenges but there are potential solutions. We explore multiple options to resolve your situation below.
Work With Your Lender to Modify Your Second Mortgage
If you are delinquent on a second mortgage your best option is to approach the lender and attempt to negotiate a solution that makes the loan more affordable. This can be achieved by lowering your interest rate, extending your loan term, reducing your principal balance or modifying the loan some other way.
Please note that the second mortgage lender has no obligation to modify your loan by implementing any of these measures. If you are underwater on your mortgage; however, the second mortgage lender may be more willing to work with you because this may be the only way it recovers its loan.
If you have equity in your home, the second mortgage lender may still be open to cooperating with you because the foreclosure process is complicated, time-consuming and expensive for all parties involved. Plus the second mortgage lender has the lowest lien priority so it gets paid last.
Refinance Your Second Mortgage
Another option is to see if the second mortgage lender is willing to refinance the loan with better terms. You may be able to lower your monthly loan payment and improve your financial flexibility. You may also be able to include any late fees in your new loan amount to remove those charges. Please note that if you are delinquent on your second mortgage, you can likely only refinance the loan with your existing lender as most lenders are unwilling to refinance a loan that is not current.
Refinance Your First and Second Mortgages
Another approach is to refinance both your first and second mortgages with a new first mortgage. This enables you to eliminate your delinquent second mortgage and potentially reduce your mortgage rate and monthly payment.
For this option to work, you need to have enough equity in your home to pay your combined first and second mortgage balance while meeting the lender’s maximum loan-to-value (LTV) ratio requirement. The good news is that the maximum LTV ratio is 97% for certain refinance programs, which means your homeowners equity only needs to be 3%.
If you are current on your first mortgage, you may be able to work with your existing lender or find a new lender that offers better terms, although you are in a gray area because you are delinquent on your second mortgage. The table below outlines mortgage refinance terms for lenders in your area. I recommend that you contact multiple lenders to determine if refinancing is a feasible option and to find the best refinance rate and fees.
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Distressed Refinance Mortgage Programs
Another option to explore is a distressed mortgage refinance program. These programs are ideal for borrowers who are underwater on their mortgage but can stay in their home with a more affordable monthly payment.
Distressed refinance programs do not apply a maximum LTV ratio and do not require credit or appraisal reports in many cases, which makes it easier to qualify. More popular refinance assistance programs include the Enhanced Relief Refinance Program and the High LTV Refinance Option Program.
Review Distressed Mortgage Refinance Programs
The downside of these programs is that you usually must be current on your mortgage to qualify with no missed payments within the past six months or late payments within the past year. If you are delinquent on your second mortgage, you may not be eligible for these programs but it may make sense to look into them further if you are current on your first mortgage.
Refinance Your Second Mortgage with a Private Money Loan
If your lender is not willing to refinance or modify your second mortgage and you cannot qualify for a refinance with a traditional lender, your final option is to refinance your second mortgage with a private money lender. Also known as a hard money lender, a private money lender may be willing to refinance a delinquent second mortgage but typically charges a much higher interest rate and fees.
Review How a Private Money Loan Works
If you can afford the monthly payment for a private money second mortgage, you could at least eliminate the potential that your current lender forecloses on your home. Additionally, if you make your payments on time for one-to-two years, you could refinance the private money loan with a new second (or first) mortgage with a lower interest rate in the future.
If you decide to pursue the private money loan option, be sure to understand the significantly higher rate and fees as well as any prepayment penalty you may be required to pay.
You can use the FREEandCLEAR Lender Directory to search for private money lenders in your state.
Sources
"Refinance Overview." Know Your Options. Fannie Mae, 2020. Web.
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