Secondary lien holder foreclosure

7 Replies

Can a secondary lien holder start a foreclosure process? If I were to loan some money to use toward a down payment while a bank finances the rest, so I am a second or junior lien holder, would I be able to foreclose if I don't get paid? I'm pretty sure I've heard of this being done in some podcasts where somebody buys the second note, but I want to know for sure as I am considering lending some money to help someone with a down payment, but after speaking with the bank they would take it but I would be considered a second lien. So just in case I don't get paid I want to know what is my recourse. Thanks knowledegable BP members!

Yes...and they do it often. You are a private lender it sounds like so hopefully your note provides for remedy in the event of default. I would not recommend trying to foreclose on your own and would instead, refer your loan to an appropriate foreclosure trustee or attorney. Idaho does both judicial and non judicial foreclosures. You would need an attorney to file a lawsuit for a judicial foreclosure but hopefully (Again) your note provides for remedy under the power of sale clause typically found in most notes and deeds of trust.

Assuming the property is in Idaho: Idaho Code § § 45-1505 to 45-1515

My two cents is, don't lend money that you aren't prepared to lose. If they default and you in a position to foreclose, you would do so subject to the senior lien and if they need your money to close the deal, chances are there is not sufficient equity for you to lose both your money AND have the money to pay off the senior. That's an assumption on my part though. Maybe you are wealthy and have money to burn. If that's the case, have at it!

Agreed. Yes, you can foreclose but unless some bidder is willing to bid some amount for your loan And be responsible for the first mtg, you get nothing......unless you want to take it back and Still have to pay off the first mtg. Likely scenario if you have to foreclose....you get nothing.

I like what Wayne said.  I would be very careful lending in a 2nd position unless there is a lot of equity.  Even then the risk is much higher being in 2nd position vs 1st position.  There is a good chance if you foreclose on the property in 2nd position with little equity, you will get nothing.  And use a professional to do the foreclosure if it gets that far.

I agree that lending in first position is the only recommendable way to go. There are some advanced tactics Junior lien holders can employ to stay in the game in the case of total default (e.g. keeping that first loan paid in full so the primary note holder doesn't start the foreclosure process). But you'd be at significantly higher risk to get nothing, in a worst case scenario.  

In case you have an inspiration to proceed anyway, be sure you are set up to receive notices if insurance or primary mortgage isn't paid and schedule a reminder to check in with the county to see that taxes are paid.

Originally posted by @StacyA McBain :

I agree that lending in first position is the only recommendable way to go. There are some advanced tactics Junior lien holders can employ to stay in the game in the case of total default (e.g. keeping that first loan paid in full so the primary note holder doesn't start the foreclosure process). But you'd be at significantly higher risk to get nothing, in a worst case scenario.  

In case you have an inspiration to proceed anyway, be sure you are set up to receive notices if insurance or primary mortgage isn't paid and schedule a reminder to check in with the county to see that taxes are paid.

 i'm curious what notices are going to be sent by the primary other than a default notice when they start foreclosure. Also, unless the junior lien-holder is additionally insured and/or loss payee, they aren't going to get insurance notices either.

Yes - requesting to be added as an additionally insured (in the same way many property management companies are added - sometimes there's a low additional cost for this). Also, ensuring taxes and insurance are paid out of escrow, and following up/monitoring tax payments annually, manually. 

There needs to be some equity in the property. I have bought some 2nds but there was plenty of equity so that if I had to foreclose, I could keep making the payments after foreclosure and still be in a good position to be able to refinance the property with the first or keep as a rental.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here