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What happens to my second mortgage in a short sale? Many of our Connecticut short sellers have multiple lien holders – most commonly in the form of a second mortgage. In order to be able to sell the house, all the liens against the property must be addressed so that clear title can convey to the buyer.
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. In the past few years general guidelines have been established with most investors as to how much a junior lien holder will be paid out by the first in a short sale. This figure generally varies depending on the investor on the first mortgage.
FHA, VA, Fannie Mae and Freddie Mac and most other investors carry their own guidelines and are very predictable.
However, some loans are not backed by one of the major investors and those short sales do not fit into any existing program. It is in those instances that a second lien holder is 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, and the situation will need to be negotiated.
For example: Lets 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 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 Connecticut 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 Connecticut 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.