Foreclosure Sales and Junior Mortgages
What is a Junior Mortgage?
A junior mortgage is a type of mortgage that is secured by property that already has a first mortgage on it. It is also known as a “second mortgage”. Thus, if a person already has an original mortgage on their home, then takes out an additional mortgage loan, the second loan is called the junior mortgage. The first or original mortgage is known as a “senior mortgage”.
Many people will take out a second mortgage in order to obtain additional funds for other costs such as down payments or credit card debt. Junior mortgages are sometimes disfavored by lending institutions because the debtor often has little to no equity in the home property. It is common for a homeowner to take out more than one junior mortgage over time.
What Happens with Junior Mortgages During Foreclosure Sales?
If a person is unable to keep up with mortgage payments, it may result in a foreclosure sale. In a foreclosure sale, junior mortgages are said to be “subordinate” to senior mortgages. This means that proceeds from the foreclosure sale will first be used towards satisfying the debt from the original mortgage. After that, any remaining proceeds will go to junior mortgages.
Thus, the priority for the distribution of proceeds from a foreclosure sale is as follows:
- First, proceeds will be used towards the payment of the cost of the suit or foreclosure proceedings;
- Next, proceeds will be used towards satisfying debt from the senior mortgage, plus interest;
- After that, any remaining proceeds will go towards paying off the junior mortgage(s);
- Finally, remaining proceeds (if any) will go to the owner of the premises or the mortgagor. The foreclosure proceeds are usually exhausted before this point
What if the Foreclosure Proceeds are Not Enough to Satisfy a Junior Mortgage?
If the overall proceeds from a foreclosure sale are not enough to pay off a junior mortgage, the borrower is not released from their debt obligation. They will still be required to make good on any outstanding payments that are owed to the junior lender.
In the event that the borrower is unable to pay off the debt from a junior mortgage, the lender may choose to file for a deficiency judgment. A deficiency judgment allows the junior lender to sue the borrower in order to obtain the payment costs. Deficiency judgments are not always allowed in all states.
Thus, for example, if the borrower still owes $1,000 for a junior mortgage after a foreclosure sale, the deficiency judgment would allow the junior lender to collect the $1,000 from the borrower. This is usually accomplished through collection orders such as wage garnishment or allowing the lender to levy on the debtor’s bank account.
If the borrower does not have the $1,000, they may be required to forfeit some of their additional property in order to meet the debt. While a junior mortgage lender usually can’t claim the real estate property in question, they may be able to reach other assets like the person’s car or other personal property.
Do I Need a Lawyer for Junior Mortgages?
If you are facing foreclosure on your home and you have taken out a junior mortgage, you may wish to contact a real estate lawyer. Junior mortgages can make the foreclosure process more complex, especially if have more than one. Your attorney can help advise you and provide you with valuable guidance. An experienced lawyer can also help you defend your interests if a deficiency judgment is underway.
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Last Modified: 03-27-2012 03:08 PM PDT
