Unwise to skip second mortgage payment

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Dear Dr. Don,
Can a second mortgage foreclose even if the first mortgage is current? My second mortgage is wholly unsecured, meaning the value of my home is less than the balance of my first mortgage. What can the second mortgage lender do if I cannot afford to pay them?
— Christian Collateral

Dear Christian,
The second mortgage lender has both the ability and the right to foreclose but, if you’re upside down in the first mortgage, there’s not much point in the second mortgage lender pursuing foreclosure. That’s because the first mortgage lender would realize the net proceeds from the foreclosure and the second lender wouldn’t get any money.

Some homeowners have taken that to mean they can do as they please in terms of making the loan payments on the second mortgage. That’s a risky route to take. Your action could force the lender to take steps you didn’t envision. I can’t be much more specific than that because the lender’s remedies depend on applicable state laws. You should discuss this topic with a real estate attorney before pursuing that route.

Skipping payments will have a negative impact on your credit report and credit score. Working with the lender to obtain relief on the terms of the second mortgage is a preferred alternative.

You may also have options available to you under the “Helping Families Save their Homes Act 2009” modification of the “Hope for Homeowners” program.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.