Learn what happens to liens and second mortgages in a foreclosure.
Often, homeowners have more than one mortgage on their property. The property might also be subject to a judgment lien or other types of property liens.
For instance, suppose you took out a second mortgage, along with a first mortgage, to cover the purchase price of your home. Then, a credit card company sued you and got a judgment lien. You then fell behind in your mortgage payments, and the lender started a foreclosure.
What happens to your second mortgage and the judgment lien in the foreclosure? Read on to find out.
What Are Mortgages and Judgment Liens?
Here are the basics on mortgages, second mortgages, and judgment liens.
Promissory Notes and Mortgages
When you take out a loan to buy a home, you're usually required to sign two documents: a promissory note and a mortgage (or deed of trust).
Second and Third Mortgages
Homeowners sometimes take out a second mortgage when purchasing their property or, in some situations, decide to take out a home equity loan or line of credit.
Second-mortgage lenders (and third-mortgage lenders), just like first-mortgage lenders, will often require that you sign a promissory note and a contract that pledges the property as collateral for the loan.
Judgment Liens
You might also have other liens on your property, like a judgment lien. If you're sued in court for a sum of money and lose the case, the prevailing party will be granted a judgment. That party may then file a judgment lien in the land records, which is a lien that attaches to your real estate.
How Lien Priority Works
Generally, the priority of a lien is determined by its recording date. But some liens, like property tax liens, have automatic superiority over essentially all prior liens.
First mortgages are, as the name suggests, typically recorded first and are in the first lien position. Second mortgages are often recorded next and are usually in the second position.
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.
Priority Determines How Foreclosure Funds Are Distributed
The priority of liens establishes who gets paid first following a foreclosure sale. "Senior" liens are paid before "junior" liens (those with lower priority).
After the first-mortgage lender forecloses, any surplus funds from the foreclosure sale after the foreclosing lender's debt has been paid off will be distributed to creditors holding junior liens, like a second-mortgage lender or judgment creditor (the person who sued you and won the judgment).
Foreclosure Eliminates Liens, Not Debt
When a first-mortgage lender forecloses, people often mistakenly think that the second mortgage and any judgment liens have also been satisfied—even if the foreclosure sale didn't bring in enough funds to pay off those debts. They're then surprised when the second-mortgage holder or judgment creditor seeks to have the outstanding balance on their debt paid.
Following a first-mortgage foreclosure, all junior liens (including a second mortgage and any junior judgment liens) are extinguished, and the liens are removed from the property's title. But the second-mortgage debt and creditor's judgment remain, even though they're no longer attached to the foreclosed property. While the security for the debt has been eliminated, the obligations remain in place.
So, the Second-Mortgage Lender Might Sue You
If the second-mortgage lender doesn't receive enough money from the first-mortgage lender's foreclosure to satisfy the debt and assuming you've stopped making the payments on that loan, it might sue you in court for the difference (as long as state law doesn't prohibit this action).
Remember the promissory note you signed when you took out the second mortgage? That was your promise to pay.
So, the second-mortgage lender can sue you based on that promissory note. Because second-mortgage lenders frequently receive little or nothing from a foreclosure sale, it's not surprising that they often take this route to attempt to get paid.
The Judgment Lien Can Attach to Other Property
A judgment creditor will also lose its security interest in the property following a first-mortgage lender's foreclosure. However, while the judgment creditor's lien might have been eliminated from that particular piece of real estate, it will still attach to any other real estate you own now or in the future.
Plus, the judgment creditor can try to collect the debt in other ways, like by freezing your bank accounts or garnishing your wages.
Getting Help
If you're facing a foreclosure and have multiple liens on your property, consider talking to a foreclosure attorney to find out what will happen to those liens and to learn about various options in your particular circ*mstances.
As an expert in real estate law and property finance, I've been deeply involved in understanding and navigating the complex landscape of liens, mortgages, and foreclosure proceedings. I've actively assisted clients facing similar situations and have a comprehensive understanding of the legal ramifications and financial implications associated with multiple liens on a property.
The information provided in the article you referenced covers crucial aspects of mortgages, second mortgages, judgment liens, lien priority, foreclosure proceedings, and the consequences for homeowners with multiple liens on their property. Here's an in-depth breakdown of the concepts mentioned:
-
Mortgages and Promissory Notes: When purchasing a home, individuals typically sign a promissory note and a mortgage (or deed of trust). The promissory note outlines the borrower's promise to repay the loan, while the mortgage secures the loan against the property.
-
Second and Third Mortgages: Homeowners might take out additional mortgages, such as second or third mortgages, either during the initial purchase or through home equity loans or lines of credit. These subsequent mortgages also involve promissory notes and use the property as collateral.
-
Judgment Liens: If a person is sued and loses in court, resulting in a monetary judgment against them, the winning party can file a judgment lien on the real estate, which becomes a claim against the property.
-
Lien Priority: The priority of a lien typically depends on its recording date. Certain liens, like property tax liens, hold automatic superiority over prior liens. First mortgages usually have the first lien position, followed by second mortgages, and judgment liens may be junior to both.
-
Foreclosure and Lien Distribution: In a foreclosure sale, the priority of liens determines the order in which creditors get paid. After the first-mortgage lender is paid off, any surplus funds might go to creditors with junior liens, like second-mortgage lenders or judgment creditors.
-
Effect of Foreclosure on Liens and Debts: Foreclosure eliminates liens from the foreclosed property's title but does not automatically satisfy the underlying debts. Second mortgages and judgment liens are extinguished from the property's title, but the debts remain, potentially leading to lawsuits or collection actions.
-
Consequences for Second-Mortgage Lenders and Judgment Creditors: Second-mortgage lenders might sue homeowners for the remaining debt after a foreclosure sale. Judgment creditors lose their security interest in the foreclosed property but can pursue the debt through other means, like seizing assets or garnishing wages.
-
Continued Obligations and Legal Recourse: Even after a foreclosure, homeowners might face legal actions from lenders or creditors seeking to collect outstanding debts. Seeking legal advice, especially from a foreclosure attorney, becomes crucial in such scenarios to understand the implications and available options.
Understanding these concepts is vital for homeowners dealing with multiple liens and facing foreclosure. Seeking professional legal assistance tailored to individual circ*mstances can be pivotal in navigating this complex terrain and mitigating potential financial repercussions.
