What happens to my second mortgage or HELOC if I need to short sell my home?
Many of our short sellers have a second mortgage or HELOC (home equity line of credit). In a short sale all mortgages and liens need to be settled in order to pass clear title to the buyer and complete the sale. Here's how it works:
When the home sale price is enough to cover the entire balance on the first mortgage:
The first position lien holder (usually the first mortgage) always gets paid first. If the proceeds of the sale are enough to satisfy the first mortgage and closing costs, with something leftover for the second, a short sale with just the second mortgage will address any shortage to the second.
EXAMPLE:
John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $230,000. Wells Fargo gets paid in full, and John must go through the short sale process with Navy Federal as they will not get full payment.
When the home sale price is insufficient to cover the balance on the first mortgage:
Sometimes, proceeds from a sale can't pay either loan in full, and so two separate short sale negotiations must happen simultaneously with both lenders.
EXAMPLE:
John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $175,000. John must pursue a short sale with both lenders as neither will be paid in full.
Most of the time junior 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 mortgage will usually end up with pennies on the dollar. General guidelines have been established with the largest investors (FHA, VA, Fannie Mae, Freddie Mac) as to how much a junior lien holder will be allowed to paid out by the first in a short sale.
Sometimes junior lien holders can get difficult!
Some loans are not backed by one of the major investors and those short sales do not fit into any established guidelines. 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. Holders of first and second mortgages don't always agree on what they will settle for.
EXAMPLE:
John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $175,000. Wells Fargo says they will allow $3,000 to go Navy Federal, however Navy Federal won't settle for 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 mutually agreeable 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 to the closing.
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.
We've been specializing in short sales since 2008!
We've helped hundreds of homeowners move on from their upside down homes, and we can help you!
We went through a short sale and Minna's team was amazing every step of the way. They made a very sad and stressful time seem easier by handling all the little details. They always stayed positive and put us in contact with an amazing legal team. We couldn't be more pleased.
D.H.
Last Updated on November 5, 2024 by Minna Reid