In these trying days of credit crunch and record home foreclosures many homeowners are wondering about their particular situations and what to expect if foreclosure is in their future. Many may not understand that a short sale could take place instead of a foreclosure. Whatever the alternative, it isn’t pleasant for a threatened homeowner.

One circumstance that can occur is a short sale or a foreclosure to a home that has a second mortgage. If there is a short sale, does the holder of the second mortgage get wiped out? If there is a foreclosure, does the holder of the second mortgage get wiped out? What can the holder of the second mortgage do to assure that it gets a piece of any settlement?

First, in the case of a Short Sale Second Mortgage scenario, neither holder of the mortgage is wiped out. Both hold a lien on the property. So despite the fact that a short sale would garner far less then the true value of the property, both the holder of the first mortgage and the holder of the second will get a piece of it.

If, however, the holder of the first mortgage forecloses, then the holder of the second mortgage could be wiped out. To avoid this, the holder of the second mortgage can reinstate the first mortgage by making all past payments and delinquencies to the holder of the first mortgage thus taking control of that first mortgage. Then the holder of the second mortgage can go after the homeowner for the costs of the transaction.

On the other hand, if the holder of the first mortgage forecloses, then the holder of the second mortgage is wiped out. Of course, it will seek a remedy and the only alternative open to it is to sue for breach of contract. So, a homeowner caught in this situation will not only face losing his or her home in foreclosure, but also time in court defending against a law suit.

The best settlement for all concerned would be a short sale.