Zombie apocalypse movies are terrifying, but here’s a real horror story: “zombie” mortgage debt that chases you into foreclosure. Don’t let your finances be devoured!
What is a zombie mortgage?
A zombie mortgage is a home loan that the borrower mistakenly thought was paid or discharged but that actually remains active and has become delinquent. The borrower becomes aware of the debt when she receives a foreclosure notice for the loan, which often has gone unpaid for years.
How can this happen? Most commonly, the borrower had a second mortgage, perhaps for the down payment on a home. The borrower may mistakenly have believed that the first and second mortgage payments were rolled into one when, in fact, two separate payments should have been made. The borrower may realize the discrepancy only after receiving a foreclosure from the second mortgage lender. This can also occur with a home equity line of credit (HELOC).
Zombie mortgages can also arise when the first mortgage holder forecloses, as often occurred after the 2008 financial crisis. The first mortgage lien holder has priority in receiving payment from a home sold at auction, with any leftover funds going toward the second mortgage. If insufficient money was left to pay off the second mortgage, the second lien holder lender can sue the borrower for the unpaid balance.
Borrowers often say the lender did not communicate with them regarding unpaid second mortgages until the lender foreclosed. By that time, substantial penalties and interest had accrued.
Zombie debt can also occur when a credit card company has the right to attach a lien upon the borrower’s home in the event of default. The credit card company’s lien is in line behind the first and second mortgages. The company may sue if foreclosure sale proceeds were insufficient to satisfy the credit card balance.
How can you avoid zombie loan attacks?
- When taking out a second mortgage of any type, establish clear communication with the lender. Be sure they have your current contact information, including your mailing address, email address and telephone number. Ask specifically when and how you will need to make payments. Request documentation on all aspects of your obligations.
- Take advantage of your right to an annual free credit report through sites like Credit Karma. Look for past mortgages, first and second, that you believe to be paid off and for other forms of unpaid debt. Investigate anything that you do not understand.
If a mortgage lender or debt collector contacts you for a debt you thought was paid or discharged long ago, follow the recommendations of the federal Consumer Finance Protection Bureau. This agency imposes rules lenders and debt collectors must follow, and you have rights they must honor.
Related – Avoiding Home Seizure: What You Need to Know