When a second mortgage is held on a property, the release of the loan by two different entities is required, making the short sale process twice as difficult and twice as much work. Understanding the rights of each lender in a short sale can help homeowners make informed decisions throughout the process.
What Are Second Mortgages?
Homeowners sometimes take out second mortgages to purchase their home or borrow money from the equity of their home to make repairs, pay off debt, or to make other expenditures such as adding on a pool. If the house is foreclosed upon, supplemental mortgages like home equity loans and lines of credit are secondary and the primary mortgage that was used to buy or refinance a property has priority.
Because the lender in the first position is usually the first entity that can collect from proceedings on a foreclosure, the second mortgage holder often receives nothing in the short sale process. If the second mortgage holder wishes to receive proceeds from a foreclosure, it must initiate its own foreclosure proceedings.
Process of Short Sales
A short sale occurs when a property is sold for less money than is owed. Mortgage lenders must agree to any short sale before it can be finalized. Mortgage lenders may agree to short sales so that they can avoid the anticipated losses that they may experience if the homeowner defaults on the mortgage. When the property is sold, the proceeds go to the primary mortgage lender. If the amount paid is in excess of the primary mortgage, the second mortgage lender may receive the net proceeds. However, in many instances, the secondary mortgage holder may only receive a small fee in exchange for releasing its lien.
Negotiating Short Sales
Second mortgage holders must agree to release their lien for a short sale to be executed. They have an incentive to accept a short sale if the foreclosure would wipe out their interest in the property. Primary mortgage lenders analyze their costs that would be associated with foreclosing on the property and compare these to any potential losses they may suffer from accepting a short sale on the property. Similarly, second mortgage holders weigh the risk of receiving nothing if the home is foreclosed upon and the amount that is offered to release their interest in the property. Often, foreclosing a mortgage costs much more than accepting a short sale amount. A short sale attorney can discuss legal options and negotiate with lenders.