What happens to the second mortgage when a home is purchased at a foreclosure auction?

So you are going to bid on a house at foreclosure. The lenders for the first and second mortgage are different. Does this mean that you will buy the house at foreclosure plus the second mortgage or just the first mortgage and taxes?

Buying a house at a foreclosure auction is easy. When a senior lien forecloses, a junior lien is wiped out. So if the first mortgage holder forecloses, the second trust deed goes away. If the second forecloses, you’ll still owe the first.

Oftentimes, if a senior lien forecloses, the junior lien holder will send a representative to the auction to defend its interests by making sure the property goes for enough to pay the junior lien as well. Or they buy it themselves with the idea of reselling. That will cost them money, yes. But better than losing their whole investment.

In some states the real estate follows different sets of rules as far as foreclosing the house. For instance, in some states, first priority will be real estate taxes. If monies are available after taxes monies will go to the first mortgage then the second mortgage, third mortgage etc., etc.

The next money will go to any lien holders or attaching creditors. This process will continue until all liens and encumbrances on the property are paid. If by some chance there is still money left over it goes to the former home owner. But don’t count on it and contact an attorney to discuss your rights.

The following liens/loans remain INTACT after a foreclosure:

  • - IRS lien
  • - Local unpaid taxes (utilities, etc.)
  • - Any mortgage notes filed prior to foreclosing mortgage

Now here is one important thing you must remember. There’s a redemption period where the original owners can pay back what’s owed and reclaim the house – can be anywhere from six months to a year – so don’t be quick to dump money and updates into that house.


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