- When a homeowner faces financial distress, he may not have enough money to pay for both his mortgages. In such a situation, he may choose to make payments on the first mortgage and miss his second mortgage payments, because second mortgage lenders tend to be more reluctant to foreclose. However, the second mortgage lender has as much right as the first mortgage lender to start the foreclosure process if the homeowner misses his payments.
- Even if the homeowner is current on his first mortgage and only delinquent on his second mortgage, the second mortgage lender can initiate foreclosure proceedings. The foreclosure sale can take place two to 18 months from the first missed payment, depending on the state laws and the terms of the mortgage loan. The second mortgage lender can do this even if the first mortgage lender doesn't foreclose. However, the second mortgage lender's claim to the property is still inferior to the first mortgage lender's claim.
- A second mortgage lender's interest in the property comes after that of the first mortgage lender. This means that even in a foreclosure by the second mortgage lender, the second mortgage lender has to first use the sale proceeds to pay off the first mortgage lender. Any remaining portion of the sale proceeds then go to the second mortgage lender. Because of this, second mortgage lenders face more risk of not being able to recoup the outstanding loan amount and are less likely to begin a foreclosure process.
- In some states, if the sale price of the property does not cover the outstanding second mortgage balance, the second mortgage lender may be able to demand payment for the deficiency balance from the borrower. Legally, the deficiency balance is an unsecured debt and the borrower can enroll it in a debt settlement program. In other states, such as California, the second mortgage is a non-recourse loan, and the lender can't collect any deficiency balance.