Defaulted Loan

• When you do not make your second mortgage payments, eventually the loan will fall into default. At that point, the second lender will contact you through a notice of default. After you receive the notice of default, the second mortgage lender will work toward foreclosing on the house. The house will eventually be seized and sold to generate enough income to pay back the first and second mortgage, if possible. During the default period, you may also be able to negotiate with the lender to stay in your house if you get the loan current again.
  
  

Paying First Mortgage

• When your second mortgage goes into default, it can initiate the foreclosure process. However, even if the second mortgage holder ends up foreclosing on your house, the first mortgage will be paid first. The second lien holder can foreclose on the property even if you are current with the first mortgage. The funds that are generated from the foreclosure will be used to pay the primary mortgage first, and then anything left over will be used to pay the second mortgage.
  
  

Recourse Loans

• Depending on where you live, your mortgage is either a recourse or a non-recourse loan. With a non-recourse loan, the lender can only take possession of the property to satisfy the debt and cannot come after you for any additional funds. With a recourse loan, the lender has the legal right to pursue the rest of the money you owe after the house has been foreclosed on. If you have a recourse loan, your second mortgage holder can file a lawsuit against you for the remainder of the balance.
  
  

Considerations

• When you default on a second mortgage, the lender may not move to foreclose on the property. In many cases, when the home was foreclosed upon, the second lender will not receive enough money from the sale to pay the balance. In some cases, when lenders find out that you are in financial trouble, they will offer a settlement. They may be willing to settle for much less than you owe on the mortgage debt. While this could hurt your credit, it will help you get out from under the debt.