How to Negotiate a Second Mortgage Settlement
A second mortgage is a short-term interest-only loan that you take out with the equity available in your property that goes in second position behind your existing first mortgage. This is called a second mortgage because in the event of a default, the first mortgage lender gets paid out with any proceeds from the sale of the property and only after the first mortgage lender is fully paid does the second mortgage lender collect their repayment if there is enough money remaining from the proceeds of the sale.
Your lender for your second mortgage takes on more risk than your first lender, since they will be paid back last if you default on your mortgage. Due to the additional risk, often only private lenders give borrowers second mortgages, and they charge higher interest rates than you would see for first mortgages at a bank. These second mortgages usually come with additional fees also.
Defaulting on your second mortgage can lead to the foreclosure of your home by the lender or bank, or even a lawsuit. Fortunately, you can negotiate a settlement for your second mortgage with the help of your mortgage broker.
What If You Can’t Pay Your Second Mortgage?
Failing to make payments towards your second mortgage could result in the power of sale of your home. If the proceeds from the power of sale are not enough to cover the cost of the loan, you could also be sued personally for the remaining amount.
However, a qualified mortgage broker can help you negotiate settlement terms for your second mortgage to try and help you avoid either of those consequences.
Can a Bank Foreclose on a Second Mortgage?
If you cannot make payments toward either of your mortgages, first or second, your bank has the option of foreclosing your home , depending on how much it is valued at.
First mortgages, also known as senior liens, have priority over second mortgages, also known as junior liens. The priority determines the order in which lenders will receive repayments after a foreclosure sale.
Foreclosure proceedings will most likely be initiated by your lender if you default on your first mortgage. On the other hand, if you default on your second mortgage, the lender will determine whether to start a power of sale based on the current value of your home.
Homes with Equity
You have equity in your home if your property’s value is greater than the amount remaining on your mortgage. The more equity you have in your home, the more likely it is that your lender for your second mortgage will try to foreclosure your home in the event of mortgage default.
That is because your second mortgage is backed by your equity. If the second mortgage lender forecloses your home, they can make back some or all of the loan amount they gave you once they foreclose and sell your home.
Underwater Homes
Your home is underwater if the amount you have left on your mortgage is less than the value of the home. Underwater homes are less likely to be subject to foreclosure from second mortgage lenders.
In this case, your lender does not have enough security from built-up equity in your home. They would not be able to get back the full loan amount they gave you by selling the home, since the home is worth less than your remaining mortgage payments.
Because the lender for your first mortgage has priority, the amount from the value of the sale would also go to them first, and only the remaining amount will be used to pay back the second mortgage lender. This makes foreclosure an unattractive option for your second lender.
What happens to your first mortgage?
If you continue to make payments on your first mortgage but default on your second mortgage, your second mortgage lender can still foreclose your home if they choose to.
Once your home is sold, the profits from the sale go to your lenders in order of priority. First, the lender for your first mortgage will be repaid, followed by the second mortgage lender.
Are You Risking a Lawsuit?
Whether or not your lender for your second mortgage chooses to foreclose or initiate a power of sale on your home, you could be risking a lawsuit . This is why it can be crucial that you and your mortgage broker attempt to negotiate a settlement in the event of default.
When you secure a mortgage, you sign a promissory note, agreeing to take on the risks of defaulting on your mortgage. If you fail to make your mortgage payments, your lender could sue you personally based on the promissory note you signed.
Through a lawsuit, a lender can recover the owed mortgage amount in many ways, including taking a percentage of your income, liquidating your assets in the bank, or going after another property you might own.
Negotiate Your Settlement Terms
A bank foreclosure on your home, a power of sale, or a lawsuit against you can negatively affect your credit score, making it more difficult to secure a loan in the future. You would also be racking up thousands of dollars worth of legal fees.
Instead of having your debt follow you for the rest of your life, or spending your earned money on a foreclosure, power of sale, or lawsuit, you should contact your mortgage broker to try to negotiate a settlement with your lender.
Pay off Some of the Debt
Depending on how much you have left to pay on your mortgage, your lender may be willing to accept a lump-sum payment now that is worth less than the amount you owe to them, or they may be willing to forgive some of the added penalty and fees associated with defaulting on your monthly mortgage payments.
Your second mortgage lender’s only chance of recovering from a foreclosure or power of sale is if there is enough money left from the sale proceedings after your first mortgage lender is paid to cover the full investment of the 2nd mortgage lender. Rather than risk losing the chance of recovery, your lender may be willing to accept a lesser payment that you can make now.
This guarantees your lender will recover some of the loan, while also cancelling your debt so that you won’t have to worry anymore about your second mortgage.
List Your Home for a Short Sale
To recover some of the leftover debt owed to your lenders, you can list your home for a short sale. A short sale is when you list your home for less than the remaining amount left on your mortgage.
Both lenders from your first and second mortgage must agree to the short sale. Although this method may be slightly more risky for your lender than simply making a lump-sum payment to pay off the debt, sellers typically can sell off their homes fast since the listing price will likely be below-market.
There is also huge demand for home supply in the GTA and across Canada, and lenders know that you would not have any trouble finding a potential buyer.
Refinance Your Second Mortgage with Another Lender
If you have enough equity available in your home, you may be able to qualify for a 2nd mortgage refinance. By refinancing your current second mortgage at a larger amount, you could pay off your current second mortgage lender and even potentially include all of your upcoming monthly payments for the year in the newly refinanced mortgage amount. That way you won’t need to worry about falling behind in your payments because the new mortgage lender would factor 6 to 12 months of payments from the loan amount upfront. This can buy you time to sell your home, get your finances in order, and explore other options for the future.
Refinance Your First and Second Mortgages Into One Mortgage
If you have some equity remaining and your credit and financial situation has not been too negatively affected, you might be able to refinance and combine both of your current mortgages into one larger mortgage with a better rate and lower monthly payments.
Why Work With a Mortgage Broker
Avoid the terrible consequences of defaulting on your second mortgage by working with an expert mortgage broker from Clover Mortgage . Instead of risking a foreclosure on your home or a lawsuit against you, negotiate a settlement for your second mortgage.
A professional mortgage broker from Clover Mortgage can help you settle for less. Clover Mortgage has long established connections to dozens of lenders, giving you much greater leverage at the negotiation table than you would have on your own. With our expertise and diligent hard work, we will make sure that you can get rid of the debt from your second mortgage quickly. Secure the services of a reliable mortgage broker at Clover Mortgage.
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