Question: If a short sale takes place and there is a second mortgage on the home can both balances be negotiated away so that the homeowner has no further debt? In other words: House has primary mortgage of $500,000. Second mortgage of $50,000 but house sells in short sale for $450,000. Can the remaining $50,000 on the primary plus the $50,000 on the 2nd mortgage be negotiated away so that no debt follows or accrues to the seller? And can should that be done up front when entering the short sale process?
Answer: Yes, all liens have to be satisfied for the property to close, thus both lienholders agree. Depending on the state and anti-deficiency laws, this can be somewhat or very difficult. This negotiation is part of the normal short sale process and depends heavily on the buyer’s offer and total deficiency for the lienholders. It also depends on the seller’s financial situation. Some banks are insisting that the remaining deficiency be settled by a promissory note or cash at closing from the seller. Many banks don’t want to give up the right to go after the seller for any deficiency, so the language of the settlement is critical. Generally, the first lienholder is the foreclosing, and thus controlling entity, and would thus determine how much money goes to the second lienholder. Typically it is a very small amount, $3,000 – $5,000, and typically the second will agree since their BATNA (in foreclosure) is not very good. However, some junior lienholders can be very difficult and can force foreclosure by refusing reasonable settlement terms. Usually you can’t negotiate this settlement up front, since the most critical piece of information (the amount of Buyer’s offer, and how the funds are divided) is missing.