Creditors With Debt Priority When A House Is Lost For Financial Reasons

It is not unusual for a house to be used as collateral for not just one single mortgage.

On top of that, in certain circumstances, third parties can place a lien on the particular property too.

Ultimately, no one would spend their time bothering you as long as you make payments on your obligations on a timely manner.

However, a financial circus can come into play when defaults start to occur on one or more of the mortgages and loans… and the proceeds that can be generated from the foreclosure sale of the house is insufficient to cover all the debt that is due.

Nobody likes to have this happen to them. Yet sometimes, the better choice is to get off a sinking ship rather than stay on it.

In such events, there is a priority towards creditors that state who gets their money first.

This means that it is more than possible that creditors at the end of the queue might not get some or all of their money back.

1) First mortgage

In the majority of foreclosure cases, sales proceeds will not be enough to pay off all parties with a claim.

Because from a business perspective, being first in line is a big advantage to be in should a borrower get into financial trouble, you shouldn’t expect any less from a bank.

And in most cases, the first lender to record a mortgage against the property will have the very top priority. The lender will then have a first mortgage on the property.

And if a second mortgage is taken before the first is fully repaid, it will be termed as the second mortgage.

Sometimes the first mortgage is referred to as the senior mortgage. And any mortgage after that is referred to as junior mortgage.

For a house with multiple mortgages, if the first (senior) mortgage is fully paid off, the second mortgage will then move up the priority ranking to become the senior mortgage.

2) Subordination

In certain unique situations, by virtue of recording date, a lender could voluntarily take up a lower position and allow a party at a lower priority position to move up the priority list.

This is referred to as subordination.

While an even like this might not make sense to a bystander, be assured that lenders are not run by fools.

The situations where these events will make sense to the parties involved depends as there are usually very unique occasions.

3) Chattel liens

When chattels are affixed to land, it becomes a fixture. The confusion arrives when the land is already mortgage.

And on top of that, chattel is paid for by credit. Now the real estate faces foreclosure.

This can be a real mess to get involved in.

To mitigate this complex problem, the chattel lien holder should record a chattel mortgage which will protect the interest of the lien holder when the chattel becomes a fixture.

A chattel mortgage is basically a mortgage secured with personal property. This means that if the borrower defaults, the lender can take possession of the mortgaged items and sell them.

A financing statement can also be a legitimate enforcement document that establishes lien priority over personal property.

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