What Is A Junior Lien? (2022)

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When a consumer takes out a mortgage loan, the lender acquires a financial stake of the debtors property, this is a lien. The lender will be afforded rights to claim the property by way of foreclosure if the debtor fails to make the obligated loan repayments.

Lien means the right one party has the right to keep possession of property belonging to another party until a debt owed by the first party is settled or discharged.

What's A Junior Lien & Can It Hurt Your Credit?

If a debtor is to take a second mortgage, or home equity loan, the mortgage lender becomes a junior lienholder, with the first mortgage lender being the senior lienholder. This entails that if a debtor can no longer fulfill their debt obligations and their property is subsequently sold to pay off the debt.

The junior lien holder will only be paid second to the first lien holder. If equity from the sale fails to satisfy both loans, the first lien holder receives preference and the second lien holder would receive the residue which may not cover the entire loan amount.

Due to the risk the junior lien holder undertakes, the secondary mortgage loans will generally have a higher interest rate than that of the first loan.

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Can A Second Mortgage Hurt Your Credit?

Taking out a second or third loan won’t hurt your credit report merely for receiving the loans. If you successfully manage to fulfill the obligations of all the loans, your credit score would improve.

Secondary loans will only carry a negative impact on your credit score if you fail to uphold the payment requirements obligated by the loan. The lender may report your missed payments to credit bureaus. If enough missed payments have occurred the lender may report your account to collections, or even initiate legal action against you to reclaim the outstanding loan amount.

If the lender takes any of the above actions of recourse in order to reclaim loan amounts, once reported to the credit bureaus it will be recorded on your credit report and remain as such for 7 years.

Bottom Line

It is important to consider the consequences associated with a secondary loan. If you are uncertain consider consulting Credit Sage today, a credit repair specialist renowned for optimizing consumers credit score.

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