“John, I’m trying to open a new credit card and I’m having some difficultly. My home was foreclosed upon by the bank and sold at auction over 2 years ago. However, I had a second mortgage as well. Will the second mortgage be paid off with the funds received at auction or will I still be personally responsible for the debt?”
When it comes to questions regarding credit and debt, there is not always a simple answer. The question above is no exception to that rule. Foreclosure laws vary from state to state. Ideally, you would want to consult with a reputable foreclosure or real estate attorney prior to the foreclosure of your home.
However, if the foreclosure genie is already out of the bottle then here is some information to at least point you in the right direction. It is not uncommon for homeowners to carry more than one mortgage on their property.
In the event of a foreclosure the bank holding your second mortgage would have the right to any remaining equity received from the foreclosure sale of your home – after the first mortgage holder was paid off of course.
However, in many foreclosures the home is not sold for enough money to pay off the first and second mortgage loans. If your property is foreclosed upon then you could potentially still find yourself on the hook for any unpaid balance owed on a second mortgage.
An Example To Help Explain How This Situation Occurs
The home is foreclosed upon by the bank holding the first mortgage, aka the senior lien holder. The balance on the loan is $150,000. A second mortgage is also owed in the amount of $30,000.
The home is sold at auction for $150,000. (Note: homes are not automatically sold at auction upon foreclosure but it occurs in many cases.)
The full amount of $150,000 is paid to the senior lien holder. There are no funds left over to pay toward the second mortgage of $30,000.
Depending upon the state, the bank holding the second mortgage may have the opportunity to sue you in court in an effort to obtain a judgment on that left over balance, which is called a deficiency balance.
The unpaid, outstanding balance on the second mortgage will also remain upon your credit reports and can hinder your efforts to get a new credit card, or any other credit product. If the second mortgage was not paid off after the post foreclosure sale of your home, you might begin receiving collection calls from the second mortgage holder.
If you are being pursued for collections on a second mortgage which you sincerely cannot afford to pay or if the second mortgage holder is attempting to sue you for a deficiency judgment then seeking legal council would probably be a wise choice. Depending upon your state and the details of the foreclosure, you may be afforded certain consumer protections.
Filing bankruptcy is another option that you may consider if your home has been foreclosed upon and you are faced with a large deficiency balance on a second mortgage. However, you should think long and hard before going down the bankruptcy path. Depending upon the type of bankruptcy you file, you could be damaging your credit scores for up to 10 years.
Plus, bankruptcy is one of the FICO seven deadly sins meaning that the negative impact upon your credit scores will be very significant. Bankruptcy may be an option for you to consider depending upon your situation; however, it should probably be your option of last resort.