February 26, 2020

What happens to the second mortgage in a short sale?

SHORT SALE SECOND MORTGAGE

What if I have two mortgages and I need to short sell my home? Many of our short sellers have a second mortgage. In a short sale all mortgages and liens need to be settled in order to complete the sale. Here's how it works:

Mortgages get paid off in the order they have been recorded on title. 

The first lien holder always gets paid first, so if a sale is enough to satisfy the first, but not the second mortgage, the first will get paid in full, and a short sale 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.

Sometimes, proceeds from a sale can't pay either loan in full, and two separate short sale negotiations must happen simultaneously.

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 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 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 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.

Minna Reid

Minna Reid is a Broker Associate at Killebrew & Company Realty Inc, serving Jacksonville, Florida.

Click Here to Leave a Comment Below

Leave a Reply: