A second mortgage is a type of loan wherein the person borrows a second, subordinate source of funds on the same property. It must be noted that it is an entirely different concept from debt consolidation or refinancing.
While approving/sanctioning such a loan, commercial mortgage brokers and lenders will look out for factors such as strong employment history, good credit report, cost projection of the property, and a good educational background. Thus, these funds are not exactly easy to gain.
Their working is almost similar to an ordinary mortgage. The only difference is that the lender of the first mortgage gets repaid first or top priority is given to the first lender during a foreclosure, bankruptcy case, debt settlement, or a debt negotiation process.
In the field of real estate financing, there are several state laws and regulations that have to be complied with. There are three possible scenarios that might take place when a second mortgage lender initiates a foreclosure.
- Liquidation: A liquidation of the property means that the property is sold off and proceeds are repaid to the lenders in a sequential manner. The remaining surplus is forwarded to the borrower.
- Purchase of Lien: In some cases, lenders themselves avoid liquidation. In such a situation, one lender may purchase the lien of another during the proceedings. Such a scenario is usually seen when the value of the property is huge and shows a good market appreciation.
- Refinance or Consolidate: This kind of option is suggested by lenders when they feel that the debt-to-income ratio is very unfavorable. Hence, both loans are clubbed together, and the amount of installments and rate of interest is reduced. This is an excellent initiative to avoid liquidation.
It is, however, advisable to check the debt-to-income ratio and keep up with the required repayments. If one fails to make timely payments, then the credit ratings will fall and one might end up in financial trouble.
Hence, while borrowing a mortgage, take up terms and conditions that suit you, and will provide you a good debt-to-income ratio, and you shall be able to avoid a second mortgage foreclosure.