Home Sale Relief

I am getting hundreds of questions from people who cannot afford their payments. They have no equity or owe more than their house is worth. And they are asking if short sales are possible if they have a second mortgage?

Let’s recap what a short sale is. It’s when you sell your house for less than the mortgage. The lender approves the sale and the lender collects the proceeds from the buyer, whatever is left at closing after paying closing costs and real estate broker commissions and so forth. They mortgage lender releases the mortgage so the transaction can close.

The mortgage company now has a financial loss. They may pursue you for that financial loss, which they can sometimes do through a civil court proceeding. Sometimes they cannot pursue you at all because state law prevents them from doing so. And sometimes you can negotiate with the home loan lender before the short sale goes through, and they will agree in writing not to come after you for their financial losses.

But be that as it may, the question we are addressing is how you can do a short sale if you have a second mortgage and not just a first mortgage?

What people forget is that even if they do a sale of their house, the loans go with the house so if they deed their house to someone else, the loans stay in place. A sale of a house does not affect the loans on that house.

The reason a short sale works is that the lender agrees to release their claim on the house at the closing table. So the new buyer can get the house free from your crushing mortgage. But if you have two mortgages the short sale is much more complicated.

If the first mortgage lender agrees to a short sale, that isn’t enough. The house will be sold and still have a second mortgage on it.

A foreclosure sale, on the other hand, wipes out all the loans on the property. The lender who forecloses may get the property back through their “credit bid”. That is, if nobody bids higher than the balance on the loan including all delinquent payments and fees, the lender gets the house back. If someone bids higher, they will get the house. Either way, all the junior loans are extinguished in the foreclosure sale. A trustee’s deed or sheriff’s deed transfers title to either the lender or the high bidder. And the junior loans are wiped out so junior loans are not an issue in a foreclosure.

If you want to avoid foreclosure through a short sale process, and you have junior loans, there is a way to do it. Actually several ways.

Is the second mortgage a piggyback loan? Sometimes the lenders who made the first mortgage also made the second. Maybe they can allocate the short sale proceeds to release both loans.

Or, you may be able to buy out the second. They are in a position where they will get nothing at this point. If you can offer them a nickel on the dollar of debt, or a dime, maybe they will take it. That assumes you have a bit of cash. But it may not take much. After all they are already prepared to be wiped out.

Or you may do a deal with the second. They will release the second mortgage in order to allow the short sale to go through, and you will sign a note for a percentage of that loan. Such a note is a personal loan, an unsecured loan, and would be dischargable in bankruptcy. But if you can manage the payments this is a good outcome for all concerned compared to the alternatives.

These three options are the best ones to consider if you want to do a short sale and avoid foreclosure, but have a second mortgage on the property.