Second Mortgages & Foreclosure: What Happens If You Can’t Pay?

Facing foreclosure is stressful, and having a second mortgage can make the situation even more complicated. This guide breaks down everything you need to know about second mortgages, foreclosure, and ways to manage your debt.

What Is a Second Mortgage?

A second mortgage is an additional loan secured by your home. It allows homeowners to borrow against the equity they’ve built in their property. 

Because it’s a junior lien (meaning it’s second in line to be repaid if the home is foreclosed), it often comes with a higher interest rate than the first mortgage loan.

The amount you can borrow with a second mortgage depends on the equity in your home. Equity is the difference between your home's current market value and what you still owe on your first mortgage.

💸 More equity means you may qualify for a larger loan.

🔻 Less equity or an underwater mortgage (where you owe more than the home is worth) makes it harder to qualify.

Types of Second Mortgages

There are three main types of second mortgages: 

1️⃣ Home equity lines of credit (HELOCs)

2️⃣ Home equity loans (HELs)

3️⃣ Cash-out refinancing

Each is explained below.

Home Equity Lines of Credit (HELOCs)

Home equity lines of credit (HELOCs) are the most common type of second mortgage. It works like a credit card, allowing you to borrow money as needed, up to a set limit. 

Typically, a HELOC has a 10- to 15-year draw period, during which you make interest-only payments. Once this period ends, you must repay the full balance, usually over a repayment term of 10–20 years.

Home Equity Loans (HELs)

A home equity loan (HEL) provides a lump sum of money up front, which you repay in fixed monthly payments over a set term, typically ranging from 5–20 years. 

These loans generally have higher interest rates than first mortgages, making them a more expensive borrowing option.

Cash-Out Refinancing

Cash-out refinancing replaces your existing mortgage with a new, larger loan instead of adding a second loan. You receive the difference between the old and new loan amounts in cash, which can be used for various expenses. 

While this option may offer lower interest rates, it also resets the loan term, meaning you may take longer to pay off your mortgage.

Why Do People Take Out a Second Mortgage?

Homeowners may take out a second mortgage for several reasons, including:

• Covering a down payment on a home. Some borrowers use a second mortgage to help with the up-front cost of buying a house. A larger down payment can sometimes lead to better loan terms and eliminate the need for private mortgage insurance (PMI).

• Consolidating high-interest debt. Second mortgages can provide lower interest rates compared to credit cards or personal loans.

• Financing home renovations or repairs. Using home equity to fund improvements can increase a property's value.

• Paying for major expenses like college tuition. Some homeowners use their home’s equity to finance education costs.

What Happens if You Can’t Pay Your Mortgage?

When you take out a mortgage to buy a home, you sign two key documents: a promissory note, which is your promise to repay the loan, and a mortgage (or deed of trust), which gives the lender a legal claim to the property. Because the loan is secured by your home, the lender has the right to take back the property if you stop making payments.

This process is called foreclosure. Foreclosure begins when a homeowner defaults (fails to make required mortgage payments). Whether you’re behind on your first, second, or even third mortgage, the timeline for foreclosure depends on state laws and the terms of your loan agreement.

What Happens If You Can’t Pay Your Second Mortgage?

If you stop making payments on a second mortgage, your lender has the right to take action. 

Here’s what could happen:

• The lender may charge late fees and attempt to collect the debt. They might call, send notices, and try other collection efforts.

• The second mortgage lender may start foreclosure proceedings. However, this is less common since they only get paid if there’s enough equity in the home.

• The lender may sue you for the unpaid balance. If foreclosure doesn’t cover what you owe, the lender can take legal action to recover the remaining debt.

Your state’s laws determine how and when lenders can take legal action.

Can a Second Mortgage Lender Foreclose on Your Home?

Yes, but it depends on how much equity you have in your home.

• If your home is worth more than what you owe, the second mortgage holder may foreclose to recover their money.

• If your home is underwater (worth less than what you owe on the first mortgage), foreclosure is unlikely because the second lender would get little or nothing from the sale.

Instead of foreclosing on underwater homes, second mortgage lenders often sell the debt to a collection agency or take legal action and sue you for the unpaid balance.

Who Gets Paid First in a Foreclosure? (Understanding Lien Priority)

When a home is foreclosed, debts are paid in a specific order based on lien priority. 

💡 A lien is a legal claim against a property used as collateral for a debt. 

The general rule is “first in time, first in right,” meaning liens recorded earlier have higher priority. Here’s how payments are typically distributed:

1. Unpaid property taxes (if applicable): Tax liens take top priority, even over mortgage lenders. If you owe property taxes, the government gets paid first.

2. First mortgage lender: The primary mortgage holder is next in line to recover what they’re owed.

3. Second mortgage lender: If any money is left after paying the first mortgage, the second mortgage lender gets whatever remains.

Because second mortgage lenders are junior lienholders, they often lose money in a foreclosure sale — especially if the home is underwater (worth less than what’s owed on the first mortgage). 

If there isn’t enough equity to cover the second mortgage, that lender may lose their secured interest in the property and instead become an unsecured creditor. In this case, they may choose to sue the homeowner directly to recover the remaining balance.

Understanding lien priority is crucial because it affects whether second mortgage lenders will foreclose or take other collection actions if you default. If your home has equity, lenders may be more likely to foreclose, while if it’s underwater, they may pursue other legal options.

How Changing Your Mortgage Can Affect Lien Priority (Subordination Agreements)

If you refinance your first mortgage, modify your loan terms, or sell your home through a short sale, you may affect lien priority. In most cases, a first mortgage lender will require the second mortgage lender to sign a subordination agreement to maintain the order of priority.

A subordination agreement ensures that the first mortgage keeps its priority position, even after changes to your home loan. Without this agreement, a second mortgage lender could move ahead in the repayment order, making it harder for the first mortgage holder to recover their money in a foreclosure.

Situations that typically require a subordination agreement include:

• Refinancing: If you refinance your first mortgage, your new loan would technically be "newer" than your second mortgage, so a subordination agreement keeps the first loan in priority.

• Short sale: If you sell your home for less than what you owe, both lenders must agree on how to split the proceeds.

• Loan modification: If your first mortgage terms are adjusted to help you avoid foreclosure, your lender may require subordination to keep their priority position.

Because of lien priority rules, a first mortgage foreclosure on an underwater home can wipe out a second mortgage lender’s claim on the property. If this happens, the second mortgage lender may no longer have a secured interest in the home and may sue you personally for the remaining balance instead.

What Happens if Foreclosure Doesn’t Cover Your Second Mortgage? (Deficiency Judgments)

If your home is foreclosed and sold for less than what you owe, your second mortgage lender may still try to collect the remaining balance. This unpaid amount is called a deficiency balance.

Since second mortgage lenders are paid only after the first mortgage lender, they often recover little or nothing in foreclosure — especially if the home is underwater (worth less than the total mortgage debt). If there isn’t enough money from the sale to cover the second mortgage, the lender loses their secured claim on the home but may still pursue other debt collection options.

Many second mortgage lenders choose to sue homeowners directly for the unpaid balance. If the lender wins the lawsuit, they can get a deficiency judgment, allowing them to:

• Garnish wages by deducting money from your paycheck

• Levy bank accounts by freezing or withdrawing funds

• Place liens on other property you own

If you receive a summons for a deficiency lawsuit, you must respond to avoid an automatic judgment against you. Before going to court, some homeowners negotiate a settlement or request a short sale to reduce their debt.

What Can You Do If You’re Facing Foreclosure?

If you’re struggling to pay your second mortgage, you have several options that may help you avoid foreclosure:

• Negotiate a settlement. Some lenders may accept a lump-sum payment for less than what you owe, especially if your home is underwater (worth less than your total mortgage debt). Since the lender risks getting nothing in the foreclosure process, you may have room to negotiate.

• Request a short sale. If both your first and second mortgage lenders agree, you might be able to sell your home for less than what you owe. This allows you to settle your debts and avoid foreclosure.

• Apply for a loan modification. Some lenders offer loan modifications to adjust your mortgage terms, such as lowering your interest rate or extending the repayment period, to make your payments more manageable.

• Explore foreclosure mediation. Some states offer foreclosure mediation programs, which bring homeowners and lenders together to discuss alternatives to foreclosure. This can be a chance to work out a repayment plan or modify your loan.

• Consider bankruptcy. Filing for Chapter 7 bankruptcy may eliminate your second mortgage debt if your home is underwater. Chapter 13 bankruptcy can help you catch up on overdue payments over time. 

If you need support figuring out how to deal with your debt and financial situation, Upsolve has a free screener that can help! If you want to explore bankruptcy as an option to help with a second mortgage foreclosure, Upsolve can refer you to a local bankruptcy attorney for a free consultation. An attorney can provide legal advice specific to your situation.

Let’s Summarize…

Second mortgages, like first mortgages, are secured by your home. But since they are “junior” liens, second mortgage lenders only get paid after the first mortgage is satisfied. If you default on payments and your home has equity, a second mortgage lender may foreclose to recover their money. If your home is underwater (worth less than what you owe), foreclosure likely won’t cover the second mortgage, and the lender may sue you for the remaining balance instead.

If you’re facing foreclosure or legal action from a second mortgage lender, you may have options. You could try negotiating a settlement, requesting a short sale, or exploring loan modification. You can get support from a private foreclosure attorney or HUD-approved housing counselor. 

In some cases, filing for bankruptcy may help eliminate or restructure your debt. Upsolve can connect with a local bankruptcy attorney for a free consultation.