How Does a First Mortgage Differ From Other Home Loans?

Mortgage debt settlement can be difficult, as a mortgage is a secured debt. This is especially true for a first mortgage on a home, as the lender who has the first mortgage on your house has first rights to foreclose and collect the proceeds from a sale if you do not pay. To better understand why mortgage debt settlement is difficult, it is important to understand why a first mortgage is different than other home loans you may have.

Understanding a First Mortgage

When you buy a house, you are taking on secured debt in the form of your mortgage. This means the home acts as collateral for the loan and if you do not pay, the lender can take the house and sell it to recoup the money you owe. If you take more than one mortgage, the house acts as collateral on all the mortgages. However, the lender who holds the note for the first mortgage has a higher priority or "first dibs" on the proceeds from the sale of the home.

For example, assume that you bought a house and you had no down payment to put down. Few, if any, lenders would lend you 100 percent of the value of the house in one mortgage. However, many people buy homes this way under a structure called an 80-20 loan. The individual buying a house this way takes an 80 percent first mortgage and a 20 percent second mortgage. Either lender could foreclose on the home if you didn't pay, but any proceeds from the sale would first go to pay off the first mortgage and would then go to pay subsequent mortgages.

So, assume for example that you bought a $100,000 house. Your first mortgage, for 80 percent of the value, would be an $80,000 mortgage. The second mortgage would be for $20,000 to make up the difference between the cost of the home and the first loan. Now, assume you haven't paid any of your principle down and you still owe the full $100,000. Unfortunately, if property values fall, you could end up owing more than the house is worth. For example, if your house is now worth only $90,000, then when the bank forecloses, they'd only be able to sell it for $90,000. In such a situation:

  • The first mortgage lender would get his full $80,000 back
  • The second mortgage lender would only get $10,000 back, since there'd only be $90,000 available, $80,000 of which would already be claimed.

As such, the second mortgage lender would be more willing to allow you to settle the debt for less than the full amount owed, since they'd have less of a chance of getting back their money in foreclosure. The first mortgage holder wouldn't have very much incentive to let you settle your debt since the mortgage debt settlement agreement wouldn't net them as much as foreclosing and getting their full $80,000 back. 

Getting Help

If you find yourself unable to afford your house and you are hoping to arrange a mortgage debt settlement agreement, it can be very helpful to get legal help. An experienced attorney can assist you in negotiating with your lender and getting the lender to agree to accept less than what is owed. 

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