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Zombie Second Mortgage Huant Homeowners

Zombie “Second Mortgages” Haunt Unsuspecting Homeowners

Foreclosure Nightmares

A second mortgage included in bankruptcy can foreclose years after it has been discharged, and can cost you a lot of money!

As an expert in helping homeowners and homebuyers qualify for home loans after a bankruptcy, foreclosure, short sale or deed in lieu, I talk to folks all over the Country every single day about the challenges of recovering from financial hardship.

A nightmare trend that I am seeing more and more often, is Zombie second mortgages rising from the past to haunt unsuspecting homeowners by starting foreclosure proceedings, and threatening your ability to stay in your home that you fought so hard to keep.

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Just when you thought you were safe to start your financial life over again, and continue to live in your home without the fear of a toxic mortgage, out jumps this second lien holder, trying to get their money back by foreclosing on your home.

I Thought The Mortgage Was Discharged?

If you had a second mortgage when home values plummeted in the recent past, chances are that your home value was upside down, and there wasn’t even enough equity in the home to cover the second mortgage.

Unfortunately, many bankruptcy attorneys told homeowners that by including the mortgage in the bankruptcy that you are no longer responsible for it.  That’s not exactly true.  The truth is, you are not responsible for the mortgage, but the lender still has a lien against your home.  If you stop making payments on your mortgage, the lender has the right to foreclose.

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many homeowners continued to pay the first mortgage, and stopped paying the second mortgage years ago

Based on this inaccurate information from the bankruptcy attorney, I speak to many homeowners that have continued to pay the first mortgage on time for years, and stopped paying on the second mortgage years ago.

During the initial fall-out of the crisis, the second mortgage couldn’t do anything because there was no equity in the home.  If a second lien holder initiates a foreclosure, the first mortgage holder gets their money first, and if there’s anything left over, the second lien holder can recuperate part, or all of what’s owed to them.

Here are are, almost 10 years since the beginning of the crash, and home values have jumped back up, very close to where they were in 2006.  At least that’s what happened in California, where I live.

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Now that there is equity in the home, second mortgage holders are starting to pay attention to all of those loans that they haven’t received payments on since the loan was discharged through the bankruptcy.  Bankruptcy law prevents the lender from coming after you for payments, but they are 100% within their rights to start foreclosure proceedings and take your home from you.

How to Stop a “Second Mortgage” Zombie

If you have a second mortgage Zombie chasing after you, you don’t have a lot of time to react.  Hopefully you are reading this, realize that you may be in this situation, and have the ability to be proactive and stop the Zombie in it’s tracks before it comes after you.

There are essentially only three ways to stop a “second mortgage” Zombie from taking your home:

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1. Pay the second mortgage off in full 

This obviously isn’t an ideal situation.  The biggest problem here is that you would not be able to refinance the home to pay off the second mortgage, because technically you have a defaulted mortgage, and a lien against your property.

2. Let the second mortgage foreclose 

If you were planning on leaving the home anyway, this might be your opportunity to finally be done with it.  The worse case scenario is that you can buy a new home 4 years from the discharge of the bankruptcy using a Conventional mortgage as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.

3. Sell the home, take your money, and run

If you let the Zombie foreclose on your home, they are going to trump up a bunch of attorney fees, penalties and interest and try to consumer as much of your equity as they can.  Remember, Zombies are ruthless!  Knowing what you know now, you can be proactive and sell the home.

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This option will put more of your equity in your pocket, and give you control over the timeline.  Similar to option #2, Conventional financing will allow you to buy 4 years from the discharge of the bankruptcy as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.

By far this is the best option of the three.

The Lesser of All Evils

If you are in this situation currently, I’m sure you’re horrified.  Just when you thought it was over, and you are safe, the ugly reality of the situation manifests itself in a completely unexpected way, putting you right back to where you were in the beginning of this whole mess.

While it may seem like a stretch, there is good news here.  The good news is that by knowing how to deal with this problem, you have an opportunity to get in front of it.  Ignoring is is only going to make things worse.  The longer you live in the home, the more equity you are going to earn, and the hungrier the Zombie gets.

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The guidelines for buying a new home after a financial hardship can offer you options for getting back on your feet, without too much trouble in most cases.

As I’ve mentioned above, Conventional financing will allow you to buy 4 years from the discharge of the bankruptcy as long as you discharged the mortgage debt, and no longer have liens against the property attached to defaulted mortgages.  FHA and VA loans will require a minimum waiting period from the date of the foreclosure, short sale or deed in lieu of foreclosure.

NOTE: CLICK HERE for more information on waiting periods before buying after a financial hardship

If you have questions or comments, please ask below.  I will answer all questions in a timely manner!

About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Joyce Davis says:

    I recently got divorced and I got the house but with 2 mortgages. The problem is I can’t afford to keep paying the second mortgage I have been behind for 4 months already if I can’t pay it and it get charged off can they foreclose on my 1st mortgage. There is no equity in the home.

    • Scott Schang says:

      Hi Joyce, you have a couple of options here. Yes, the second mortgage holder can foreclose on the home, but if there is not enough equity to cover the second, it wouldn’t make sense for them to do so. The first mortgage holder would need to be paid in full first before they get a dime. The first option is letting the second mortgage go into default, and “waiting around” for them to start foreclosure proceedings.

      Another option would be to sell the home for as much as you can get for it. If you cannot sell the home for enough to cover both the first and second mortgage, that would be considered a short sale. Which just means that you sold the home for less than what was owed on it.

      The last option, which will buy you time but doesn’t necessarily save your home, is to file bankruptcy. Bankruptcy will postpone the foreclosure until the discharge date.

      The “light” at the end of the tunnel here is that if you sell the home, and can cover both mortgages, you could be in a position to buy again after 12 months or so (depending on your credit score and down payment).

      If the home is foreclosed, or if you file bankruptcy, it’s only a 3 year waiting period before being eligible for an FHA loan.

      My last thought on Bankruptcy. Since you were awarded the home in the divorce, a Chapter 13 bankruptcy might be your best option. You can ask the judge to strip the second mortgage entirely, and you would only be left with the first mortgage.

      If you would like, you can shoot me an email to scott@findmywayhome.com, and let me know what State you’re in. I can try to recommend a bankruptcy attorney that can help you understand that option.

      I’m so sorry that these are the only options I can think of, I know that none of these options are great, but I hope that at least it helps you navigate this challenging time.

  • Goodnight67 says:

    Hi, first thank you for this information. I have a first and second mortgage on my condo. They were both discharged bankruptcy in 2012 but I have been paying both faithfully along with the condo fees. However, due to financial hardship of living alone I now need to leave my home and rent. I tried selling with a real estate agent here in CT and things are not going well.The second mortgage is really expensive and the first is also. There is not much equity in the house at this point. I have read I would be responsible for the condo fees and the short sale may be a long process. I am not sure what to do. Will you give me advice please?