What Happens to My Second Mortgage in a Short Sale?

Many homeowners who are involved in a short sale have multiple lienholders – most commonly a second mortgage.

"In order to be able to sell the house, all the liens against the property must be relieved."

“A lot of folks commonly believe they don’t have to worry about their second mortgage as they will have no say in the short sale, but the opposite is true – junior lienholders are likely to be the most difficult obstacle in getting your short sale approved, and they have the ability to stop your short sale from happening altogether."

Most of the time second mortgages are assuming the largest loss in the short sale. While the first will end up with a good portion of their investment, the second will usually end up with pennies on the dollar and are therefore likely to make your short sale more difficult, or ask for greater proceeds than originally anticipated. First mortgages are not always willing to pay second mortgages what they demand in order to release their lien.

For example: Let’s say you have a first mortgage for $150,000 and a second mortgage for $50,000 and the home is now being sold at market value of $100,000. The first mortgage agrees to the short sale for $100,000 and agrees to pay the second $3,000 out of the $100,000 to release their lien. However, the second mortgage disagrees. They will not release their lien for a penny less than $5,000.  As you can see, this presents a shortage. This obstacle must be overcome in order to get to closing.

In an instance like this one, an experienced short sale negotiator will be able to work with your lienholders in order to get them to agree to a mutual payoff amount or to minimize the shortage by as much as possible to make it easier for the parties to absorb. However, it is very possible that the shortage cannot be completely eliminated and the buyer or seller will have to come up with extra funds to satisy the demands of the second in order to get the closing. Sometimes a promissory note from the seller may suffice.

Liens beyond a second mortgage will follow a similar process.

When entering into a short sale with multiple lienholders, a situation like the one described above should be anticipated. Your best defense as a seller is to have an experienced, successful short sale agent working on your behalf.  This is no time for cousin Vinny who happens to have a real estate license to take a stab at trying out short sales. Choosing the right Realtor here is critical.”

Call me today, to assist, or any questions you may have with your short sale transaction!