With the short sale market being so popular right now I get questions from people all day long. I thought it would be a great idea to share those questions and the answers.
The question for this post is, “what happens to my second mortgage in this whole mess of a short sale?”
In order to be able to sell the house, all the liens against the property must be taken care of. Some people believe the second mortgage doesn’t have to be paid at all and that is not true. The second are most likely to be the most difficult in getting the short sale approved, and they have the ability to stop the short sale from happening altogether.
In most cases the second mortgage is assuming the largest loss in the short sale. While the first will end up with the biggest chunk of money, the second will usually end up with pennies, thus likely to make the short sale more difficult The first mortgage is usually willing to pay the second mortgage 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 lien holders 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 satisfy 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 lien holders, 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.”