2nd mortgage responsibility (short sale, foreclosure, refinance)

[karlsaz]

I purchased a home with a 80/20 loan. I redid my 2nd loan 2 years later. Will I be responsible for paying back the second loan if the first is foreclosed on?

[Ponderosa]

Originally Posted by karlsaz

I purchased a home with a 80/20 loan. I redid my 2nd loan 2 years later. Will I be responsible for paying back the second loan if the first is foreclosed on?

Probably since it was redone and therefore not used as purchase money. If you just refi'd it to lower the interest then you'd be OK but if you took out any cash that you can't show went to home improvements, then you're on the hook. Having said that, the note holder may not go after you anyway (by after you I mean trying to get a judgment. They will set the collection dogs on you for sure). It costs them money to do that and if there is no reasonable chance they will recover, then they may just write it off. Also, if they do pest you or get a judgment and garnish, you may be able to declare bankruptcy and that would wipe it out as it is an unsecured debt at the point the house is foreclosed. If you walk on it and you have assets though like money in the bank, a car that has equity, other property, it could be a very miserable few years for you.

If you have no assets at this time, it is probably better to do CH 7 instead of foreclosure as it wipes the slate, there is no recourse for lenders and you get your credit back quicker.

[crystalys]

I
Arizona is a non recourse state so if your house has gone through a short sale or you have been foreclosed on then no, the bank can not come after you for the difference of what you owe on the mortgage. The house is the collateral that the bank gave you the loan on so you give the house back to them to satisfy the loan. But I also assume by your post that you refinanced your second (20%) loan. If you refinanced that loan without taking cash out, or without rolling in other debts (ie:car loans, credit card debt, etc), and only refinanced the 20% that involved the home purchase, then no, the bank still can not come after you for that amount either. However, if you did refinance and included any other debts and/or cash out, then the bank could possibly seek reimbursment for that amount. You definitely need to get advice from an accountant or an attorney in this matter.

[Ponderosa]

One more thing. If the refi of the second is not considered purchase money then you will also get stuck for taxes owed on any forgiveness. This does not apply to purchase money - your first. But it does to the amount of any seconds that were not for the purpose of buying or improving the property.