How to Negotiate With a Second in a Short Sale

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Work with the second mortgage holder to ensure your short sale is approved.
Work with the second mortgage holder to ensure your short sale is approved. (Image: house image by hans slegers from Fotolia.com)

A short sale is a situation in which mortgage lenders accept less than the full amount of principle, interest and penalties owed on a home loan, allowing the mortgage lien to be released. If there is a first and second mortgage, a seller must be aware that both lenders will need to accept the short-sale terms. Let's examine how you would negotiate with the second-position lien holder. Second mortgage lenders have more to lose, so they can be easier to work with. However, if they are overlooked, they can hold up the sale or foreclosure.

Market the property and obtain a written offer on your home. Neither the first or second mortgage will halt foreclosure for a short sale unless you have a qualified buyer with an accepted contract. Many banks will want the property listed with a realtor. They need it exposed to buyers in your area before they can accept a short sale.

Obtain contact information for the second mortgage. Just like the first mortgage, you will need to provide the second mortgage with financial information, a hardship letter and proof that you are unable to continue mortgage payments. Provide them with the real estate purchase contract, which is commonly called the REPC. They will evaluate your real estate market, and decide if the amount offered is acceptable.

Calculate where the home sale revenue will go. Often, the first mortgage will be covered in full first if there is a second mortgage. If the offer covers the first mortgage only, the second mortgage will be in a short-sale position. The offer will need to cover the first mortgage, real estate agent fees and any closing costs. The banks typically will allow a maximum of 5 percent of the sales price as agent commissions. A second-mortgage lien holder may accept as little as $1,000 to $2,000 in a short sale. This is because even if they are owned tens of thousands of dollars, if the first-mortgage holder forecloses, they receive nothing. That being said, second-mortgage holders almost never lets the home be released without some consideration. They may lose everything in foreclosure, but if the first-mortgage holder forecloses, any remaining equity goes to the second. If they both wait until the very end, someone often comes up with money to pay part of the loan.

Keep in constant contact with the bank employee who is in charge of the file. He or she may need a committee to approve the loss, but that employee is the the sole decision maker that the seller, or seller's agent, has contact with. Fax all requested documents in a timely manner. Follow up with phone call and email verification. Keep the bank informed of any decision made by the first-position lien holder.

Obtain a preliminary title report from the title company that will close the deal and record the deed. Review it to make sure there are no other liens beyond the second one. If any other liens are recorded, they will need to be worked with as well. Mortgage note holders can negotiate a reduced pay-off amount. Liens, like state property tax and local utility liens, must be paid in full. IRS income tax liens also must be paid or a release must be negotiated. Mechanics liens also must be satisfied, but may accept partial payment or negotiated payments to release the lien and allow the sale. Mechanics liens will not survive foreclosure. For that reason, they can be negotiated for a reduced pay-off as well.

Get written confirmation of any short-sale agreement from the lien holder. When the lender decides to accept the short sale, you will need to document the amount and terms, which should go to your title company to confirm conditions to close the deal. Time frames for closing are often short and should be adhered. If you cannot close the escrow until after the time frame stated by the bank, get an extension in writing. Missed deadlines, without communication to the lender, may cause the negotiated terms to be voided. The house may then be foreclosed and the short-sale opportunity lost. A short sale will not take place without all liens satisfied in full, or an accepted, reduced amount as payment-in-full.

Tips & Warnings

  • As a buyer or seller in a short sale, it is wise to use an agent who specializes in negotiating short sales. Any agent will try a short sale but only a few specialize in this type of sale.
  • A short sale may take six to eight months to complete. It takes patience. Banks are overwhelmed with foreclosure and short-sale situations and don't have the personnel to respond as quick as buyers and sellers would like.

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