A South Carolina lender holds a first mortgage on a property valued at $350,000. A second lender holds a junior mortgage on the same property. The first lender initiates judicial foreclosure due to the borrower's default. The property sells at the foreclosure auction for $280,000. Which of the following correctly describes how the sale proceeds are distributed and what happens to the second mortgage?
Correct Answer
C) The first lender is paid in full from the proceeds first; any remaining funds go to the second lender; the second mortgage lien is extinguished by the foreclosure
In a South Carolina judicial foreclosure by the first mortgage holder, lien priority governs distribution of sale proceeds. The first mortgage is paid first from the $280,000 proceeds. Any surplus remaining after satisfying the first mortgage goes to junior lienholders (including the second mortgage) in order of priority, and then any remaining surplus goes to the borrower. Critically, when the first mortgage holder forecloses and properly names the second lender as a party defendant in the foreclosure action, the second mortgage lien is extinguished by the foreclosure sale — the new buyer takes the property free and clear of the second mortgage.
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