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. The first or original mortgage is known as a senior mortgage.
A second mortgage may be a home equity line of credit, a loan taken out for debt consolidation, or another loan secured by the home. Many people take out a second mortgage for debt consolidation, additional finances, or extra money to make home repairs and improvements.
What Happens with Junior Mortgages during Foreclosure Sales?
In the event of a foreclosure, the position of each mortgage is important. When a foreclosure occurs, the proceeds of the foreclosure sale first goes to the senior mortgage, then the remaining proceeds goes to all the other lenders depending on the order of priority.
A mortgage’s priority is determined by the time the mortgage was placed on property and recorded by the lender. A foreclosure does not destroy any interests senior to the interest being foreclosed. A foreclosure only destroys all junior mortgages if the junior mortgage was included in the foreclosure action.
Although priority among mortgages depends on when the mortgage was taken out, there are certain events that can change a mortgages priority:
- If the senior mortgage (first mortgage) fails to record and the second mortgage records first, the second mortgage will have priority over the first mortgage.
- If the senior mortgage modifies the principal amount owed by increasing the principal amount on the loan, any junior mortgage gains priority over the increased amount.
- Senior and Junior mortgagees complete a contract known as a subordinate greement, which grants the junior mortgage priority over the senior mortgage.
Having priority over other mortgage and interest is important since a foreclosure action on a mortgage will destroy all interest secondary to the mortgage being foreclosed. The junior interest debt does not get wiped out completely. A junior interest wiped out in a foreclosure sell can still sue the primary holder for the amounts owed, but they can no longer foreclose to collect the debt.
What Is the Priority for the Distribution from a Foreclosure Sales?
The proceeds of the property sold at a foreclosure is called “surplus funds.” The priority for the distribution of proceeds from a foreclosure sale is as follows:
- Proceeds will go towards the cost and expense of the foreclosure sale including payments of any attorney fees.
- Proceeds will be used towards satisfying debt from the senior mortgage, plus interest.
- Any remaining proceeds will go towards paying off the junior mortgage(s).
- Finally, if any proceeds still remain, they 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.
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. However, the junior interest that was wiped out is no longer attached to the property and cannot foreclose on the amount owed.
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.
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. An experienced lawyer can also help you defend your interests if a deficiency judgment is underway.