First Mortgage | Propertylogy

First Mortgage

By on September 17, 2018

A first mortgage is a home loan secured against the property whereby the lender will have a first-priority claim against it should the borrower defaults on the loan and liquidation actions proceed.

When a home buyer takes up a mortgage to purchase a house, the lender places a lien on the property so that they have a legal claim to it should the borrower be unable to repay the debt.

The lender will be unable to take legal action to repossess or foreclose the house as long as the borrower meets the debt obligations.

However, home owners sometimes find that there are more than 1 party who have placed liens on the house.

This can be from:

  • A second mortgage
  • A contractor
  • A private lender
  • etc

If there are more than 1 lien on a house, should the borrower run into financial trouble and forced to liquidate his assets, the many creditors might be scrambling with each other to get paid.

By having a priority system dictating who gets paid first helps to prevent a bigger mess from happening between the different creditors.

The first lender who holds the first mortgage on the property will have the first bite of the cherry.

For example, if a borrower has a first and second mortgage on the house for $100,000 and $20,000 respectively, if the proceeds from the sale of the house results in net collections totaling $90,000, then the first lender will take all of the proceeds leaving nothing left for the second lender.

If the proceeds are $110,000, the second-priority claimant will only get $10,000 after the first receives the full $100,000 that is owed.

In events of foreclosure, it is often the case where only the first mortgage lender gets anything back due to a superior lien.

This is is why lenders are always particular about having the first lien on the property.

So much so that they can sometimes even request that liens are subordinated in order to make a deal with the homeowner.



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