Consequences of second Mortgage Default

Consequences of default on a second mortgage can be good or bad, and helpful or unhelpful. Some of the worst consequences of default on a second mortgage can be avoided by more pro-active consequential solutions to default. For example, according to the Federal Trade Commission, loan modification and forbearance are more favorable consequences of mortgage default that also serve as methods to avoid worse consequences.

If one is lucky enough to obtain this type of solution, and defaults a second time on a modified second mortgage, the outcome can be harsher i.e. possible foreclosure. Some of the more helpful and unhelpful consequences of default on a second mortgage are described below, and are similar to those that apply to primary mortgages.

• Deed in lieu of foreclosure

In an effort to avoid a foreclosure, a mortgagee may be offered a deed in lieu of foreclosure which can have less credit impact than outright foreclosure. This type of arrangement transfers ownership of the home to the lender buy signing over of the property deed to the lender.

• Deficiency judgment

If a second mortgage is foreclosed the sale of that foreclosed property may not yield enough money to cover the cost of the original loan, even after being adjusted to fair value. In such case the mortgagor or buyer of the property may receive a deficiency judgment to pay the difference.

• Mortgage modification

To avoid foreclosure, deficiency judgment and deed in lieu of foreclosure, a mortgage modification may be the solution. For example, government sponsored programs that finance the difference between the actual amount of value in the home, and the difference owed by the mortgage help keep people in their homes.

• Loan forbearance

If a second mortgage borrower is in default but expects to be able to pay the unpaid debt within a set period of time, the lender may agree to mortgage forbearance. Essentially, a mortgage forbearance is a conditional grace period in which the borrower is granted more time to fulfill financial obligations on the second mortgage.

• Short sale

One way to avoid the consequence of a deficiency judgment after defaulting on second mortgage is to agree on a short sale with the lender. With a short-sale, the property is sold, the proceeds of which are considered sufficient to settle the loan regardless of amount. This means no further legal action should be taken against the mortgagor following the short sale and in regard to the collection of debt.

• Taxable forgiveness

The Internal Revenue Service (IRS) claims that mortgage loans that have been forgiven or can celled may be taxable. This means although the amount of the mortgage is no longer due, the IRS may levy a tax on this debt that is no longer due.

Defaulting on a second mortgage can lead to a number of financial consequences and personal headaches. In addition to the above potential consequences of second mortgage default a few other consequences can occur. For example,  default on the primary mortgage may be triggered by the first default, debt may spiral out of control, dealing with the debt may consume more of your life, and credit score may decline making it harder to acquire debt in the future.

If default can be avoided at all before it happens, it should have less consequences. However, if you are unable to avoid default on your second mortgage, there are steps that can be taken to help bypass some of the more debilitating and severe consequences of the default.


1. (Federal Trade Commission)
2. (Federal Housing Finance Agency)
3. (Internal Revenue Service)
4. (Idaho Department of Finance)
5. (Department of Housing and Urban Development)