Why will mortgage buyers pay a lot less for your second mortgage than you thought it was worth?
The borrower is required to make payments on both the first and a second mortgage. It is even possible to have a third or forth mortgage.
However, the first mortgage, which becomes the first mortgage by being recorded at the county recorders office first, has priority in the event of mortgage foreclosure.
In fact, if the first mortgage holder (lender or mortgagee) commences a foreclosure action they will have their attorneys do a title search. They will discover who else has a legal interest in the property. They will foreclose the interest of any second mortgage holders.
What does this mean in plain English?
Assume the property is worth $100,000. There is a first mortgage of $80,000 and a second mortgage of $10,000.
You own the second mortgage. The borrower stops making payments on the first mortgage (or deed of trust). And the lender forecloses the loan. By the time this loan goes through the legal system, the first mortgage balance could now be $90,000 and the house is probably not in great shape. The house is sold by the court (or trustee depending on the state).
You have the right to bid at the sale and pay off the first mortgage and keep the property. But would you want to? And someone else can bid on the property and if they bid enough, you will be next in line to get paid what is left after the first mortgage is paid off. (Up to the balance of what you are owed). But it's not likely to happen.
Another possibility is that you could keep the first mortgage current and foreclose your second mortgage. Most lenders will agree to this, but they may not be forced. to do this. Click here for the legal ruling on this subject.
So the chances are that you will get wiped out in a foreclosure.
This does not necessarily mean that you should never lend against a second mortgage. There are many companies that offer 125% Loan to Value second mortgages. This means, if the real estate is worth $100,000 they will give total loans against it of $125,000. However these mortgages are only made to people with EXCELLENT credit ratings.
And if you have got a higher price than you expected for your home anyway, it may be worth taking the risk. The fact is that the foreclosure rate on first mortgages is only 5% or less. So it's unlikely that the borrower will do into foreclosure.
For more information on private mortgages, check out mortgage-investments.com. The internet authority on private mortgages.
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