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It is unusual to get a principal reduction on a first mortgage, but you can get a principal reduction on a second mortgage if you know how the system works. I can be very helpful to clients when negotiating a second mortgage.

For example, I was able to negotiate a $10,000 payoff on a $120,000 GMAC second mortgage.

Lenders rarely sue for the money owing on a second mortgage. Their choice is between foreclosing and not foreclosing.

If a lender does foreclose on a second mortgage, it will generally delay doing so for years. This is why I advise clients that if they are having trouble paying their first mortgage, they should stop paying their second mortgage and put their money into paying their first mortgage.

After six to eight months of non-payment your lender will generally charge off your second mortgage and assign or sell it to a third party collector. You may then be negotiating with a third party collector.

At that point it is helpful to have a relative who can lend you some money so you can pay off the second mortgage for a greatly reduced amount. I am available to prepare a new second note and mortgage in favor of your relative.

Should the lender of the third party collector initiate foreclosure, you may still have the right to pay the back payments and reinstate your second mortgage – unless the collector institutes a court foreclosure, which is very rare.

Your second mortgage holder will foreclosure if there is more than enough equity in your property to pay off the first mortgage and, after paying foreclosure costs, holding costs, and costs of resale, there will be enough equity to pay a significant part of what is owing on your second mortgage.

For example, if your home is worth $250,000 and you owe $220,000 on your first mortgage and $80,000 on your second mortgage, neither your lender nor a third-party collector is likely to waste its time and money foreclosing. However, their mortgage will be good for many years, and if the value rises so that there is plenty of equity, a foreclosure might come out of the woodwork.

For example, if your home is worth $250,000 and you owe $120,000 on your first mortgage and $120,000 on your second mortgage, you can be fairly confident that your second mortgage lender will foreclose. After paying costs, they might collect $80,000 of the $120,000 owing to them.

Generally, your second mortgage lender or the third-party collector will not initiate foreclosure for many months, maybe many years. So you should focus on avoiding foreclosure on your first mortgage first. Never pay your second mortgage when you are not paying your first mortgage. That makes no sense at all.

Your primary goal should be to pay your first mortgage in order to protect your property. Then try to modify your first mortgage. Deal with your second mortgage later.

Never try to negotiate a principal reduction on your own. Big savings is possible if you know how the system works.

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