Foreclosing A 80/20 Loan: What Happens Next?

An 80/20 loan is a simple conventional loan where the purchase takes out a primary mortgage for 80 percent of the home’s value and a second loan for the remaining 20 percent. The 20 percent typically represents the amount of down payment needed for a home purchase. 

A borrower that needs to take out a second loan in order to meet the 20 percent down payment requirement will also need to acquire primary mortgage insurance (PMI).  PMI protects the lender against loan default when the home’s loan amount is greater than 80 percent.
In the event that a borrower is unable to meet their obligation and pay back the loan, the loan will go into default status. This results in the borrower being foreclosed on and the home reverting to the primary mortgage holder. The steps that take place following the foreclosure of a home are as follows:

Step 1: Foreclosure Proceeding

In a foreclosure the primary mortgage holder is going to want to get hold of the home as rapidly as possible. This involves going to court to establish the foreclosure proceedings and waiting for the proper filing of paperwork in order for the foreclosure to be finalized. Once finalized, the homeowner is evicted (if they have not already left) along with any property or possessions that they may have still remaining in the home.

When the former homeowners have left the building the lender can come in and make a determination as to the ability to relist the property in order to recoup any losses they may experience as a result of the foreclosure.

Step 2: Inspection and Repair

The lender who is now in possession of the home will inspect the home thoroughly for any damage or signs of distress that need attention. The lender will also prepare the home to be resold as soon as in order to pay off the outstanding loan. Depending on the condition of the home upon repossession, this could take a few weeks to accomplish or several months. The lender will make a determination, based on the prevailing real estate market and home process, what price to list the home for and where their breakeven threshold lies.

Step 3: Listing the Home for Sale

The property will be listed at a new sales price that is large enough for the lender to recover its cost. If the primary lender also made the second loan in the case of an 80/20, the sale proceeds will be used to first pay off the first loan then the second one. If another lender was involved in the lending of the 20 percent for the mortgage, that lender will be subordinated to the primary mortgage holder and only receive the residual amount resulting from the sale.