Foreclosure Sales and Junior Mortgages

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 What Is a Junior Mortgage?

When someone buys a home, they will typically finance the purchase by making a down payment in cash and borrowing the remaining amount of the home’s purchase price. A mortgage on the property secures the loan. The buyer must pay off the loan over a fixed period, usually 15 or 30 years, although it can be paid off sooner if the borrower chooses to do that.

This first mortgage may also be referred to as a “senior mortgage.” If the homeowner gets another loan secured by a mortgage, the later mortgage on the same home would be a” junior mortgage.” The original mortgage might also be called the “first mortgage” and the later mortgage a “second mortgage.”

It is possible to have mortgages after a second mortgage if the home’s value justifies it and a lending institution is willing to make such a loan. These subsequent mortgages would be referred to as “third” or “fourth mortgages,” as appropriate.

When a person borrows money to buy a home, they are usually required to sign two documents, the loan agreement, a promissory note, and a deed of trust. The loan agreement contains the provisions of the loan, e.g., the amount that must be repaid, when payments must be made when the loan should be paid off in full.

The deed of trust is a legal document that gives the lender a security interest in the real property to ensure that the loan amount is repaid. Specifically, the lender has the right to take possession of the property, sell it and use the proceeds to pay off the loan balance if the borrower does not make payments on time as required by the loan agreement.

Homeowners sometimes take out a second mortgage when buying their property to fund that purchase price. Or, once a person has bought a home with a first mortgage, they may take out a home equity line of credit, perhaps to renovate the home. Lenders of second and subsequent mortgage lenders also would require the homeowner to sign a promissory note and a deed of trust or other document that secures the property as collateral for the loan.

A person might also have other liens on their property, such as a judgment lien. If a creditor sues a person because they did not pay a debt and loses the case, the party who sued them is given judgment for a certain amount of money. The creditor may then file a judgment lien against the debtor’s property in county land records. This judgment lien gives the creditor the right to collect the amount it is owed from the property sale proceeds.

Why Might A Homeowner Take Out A Junior Mortgage?

Homeowners may take our junior mortgages for a variety of reasons. They may want to use the money from a 2nd mortgage loan for a large item or project they want to finance. The following are examples of the reasons a person might get a 2nd mortgage loan:

  • Vehicle Purchase: To purchase a vehicle;
  • Home Improvement: To fund a big renovation or home improvement project;
  • Debt Consolidation: Borrowing money in a second mortgage transaction may make sense to pay off credit cards. This may make sense if the mortgage loan has a lower interest rate than the credit card.

The Home Equity Line of Credit (HELOC) is a common type of junior mortgage. This is a mortgage that a homeowner adds to their property to get funds secured by the equity that has built up in the home as the homeowner has paid down the principal of their senior mortgage. A HELOC gives the owner cash for high-cost purchases or projects.

Are There Any Potential Problems with Junior Mortgages?

There are several potential issues with junior mortgages. First, the interest rate on a junior mortgage will likely be higher than that on a senior mortgage. Secondly, it is important to be aware that a person takes a risk with their home ownership when they take out more than one mortgage.

The risk is that if a person gets into financial difficulties, having a junior mortgage to pay and the senior mortgage makes it more likely that they could be unable to pay one or both loans. They could lose their home to foreclosure if they do not pay either or both.

What If I Cannot Pay My Mortgage?

When a homeowner cannot pay a loan secured by a mortgage on their home, at a certain point, the creditors who hold the mortgage have the right to foreclose on the home or force a sale of it. When this happens, the senior, or first mortgage, is the first in line to collect what it is owed from the sale proceeds.

The remaining mortgages are paid off in the order in which they were made. Generally, this means that the mortgages are paid off in order from oldest to newest. However, this can change depending on the following circumstances:

  • Proof of Order: The proof of how old the mortgages are in relation to each other depends on when the mortgages were recorded, usually in the office of the recorder in the county in which the property is located. Therefore, if the lender for the first mortgage failed to record the deed of trust for the first mortgage, the evidence may show that a junior, or second, mortgage was recorded first. The junior mortgage would then be paid first;
  • Increase in Principal: The junior mortgage may also take priority if the senior mortgage increased the principal amount on the loan;
  • Agreement of the Parties: Finally, the senior and junior mortgage lenders may agree that the junior mortgage is prioritized. If there are additional lenders and/or lien holders, they might also enter into agreements regarding the order of priority for payment.

What Is the Order for the Distribution of Proceeds from a Foreclosure?

Once the house is sold in a foreclosure sale, the proceeds are distributed as follows:

  • Costs and Fees: Any costs associated with the foreclosure, including fees of any attorneys involved, must be paid first;
  • Senior Mortgage: As noted above, the most senior mortgage is paid next and before other mortgages and liens;
  • Junior Mortgages: Any subsequent mortgages are paid in the order in which they were made as reflected in the public records;
  • Liens: The priority of a lien is determined by its recording date, as is true for mortgages. Judgment liens are frequently junior to a first mortgage and possibly a second mortgage, as well as perhaps other judgment liens previously filed by other creditors;
  • Tax Liens: Some liens, such as property tax liens, have priority, even over other liens that were recorded before them in time;
  • Remaining Funds: If any funds remain after all mortgages and liens are paid, the funds go to the former owner of the home, the borrower.

What If Foreclosure Does Not Produce Enough Funds to Pay Off All Mortgages?

If the foreclosure sale of a property does not produce enough funds to pay off all mortgages and liens, the homeowner/borrower is not free from the unpaid mortgage and lien debt. They must still pay back the money they owe that is not paid from the foreclosure sale proceeds.

If they are unable to do so, the junior mortgage lender may file an action against them in court, suing them to get the money they are owed. If they are successful in this action, the court issues a judgment called a “deficiency judgment.” The borrower is legally obligated to pay this judgment.

If the borrower does not pay it, the court may order garnishment of the borrower’s wages. Or, the lender may put a lien on the borrower’s bank account. The borrower may have to forfeit other property to pay back the debt. The debtor also has the option of filing for bankruptcy.

Do I Need the Help of a Lawyer for a Junior Mortgage Issue?

If you are considering a second mortgage loan or if you already have one and are concerned about foreclosure, you should contact a foreclosure lawyer. They can answer any questions and help you determine the best way forward. Your lawyer may be able to resolve your debt problem with one or more of your creditors so that you can avoid legal proceedings. Your lawyer may know about options you are unaware of, so it can be beneficial to consult a lawyer. It may help you avoid foreclosure.

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