Foreclosure

• If you fail to pay your second mortgage within 150 to 180 days of its due date, the lender who holds that second mortgage can file a lawsuit and begin the foreclosure process. In foreclosure, you must leave your home, and the bank will assume ownership and sell the property at auction in an attempt to recover what is owed. Even if you are maintaining your payments on your first mortgage, the bank that holds the second mortgage can take the home according to your lending agreement.
  
  

After Foreclosure

• If your home is foreclosed on, but the price it gets at auction is insufficient to repay the second mortgage, you may be responsible for the balance as an unsecured loan, known as a deficiency. This means you will make regular monthly payments to the lender until the deficiency is paid. If your second mortgage was used to purchase your primary residence, such as the 20 percent portion of an 80/20 loan, you may not be forced to pay this deficiency after the sale of your home if your state has anti-deficiency laws.
  
  

Upside Down Properties

• Sometimes due to falling housing values a home becomes "upside down." This means that the combination of the two mortgages is higher than the home's current value. In this situation, the lender who holds the second mortgage may not file foreclosure. During foreclosure, the first loan must be paid first, and in an upside down loan scenario, there would be no money left to pay the second loan. Instead, the lender may file a lawsuit against you to collect what is owed through wage garnishment or collecting other assets, or the lender may charge off the mortgage, selling it to a collection agency.
  
  

Credit Impact

• Every time you are 30 days or more late paying your mortgage payment, even for a second mortgage, your lender will report the late payment to the three credit bureaus, lowering your credit score. If your home falls into foreclosure or the mortgage is charged off, this is also listed on your credit rating, further lowing your score and putting a blemish on your credit rating that other potential lenders in the future will be able to see.