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By Sean A. Kelly

Often people who have a second mortgage wonder if short sale is possible, because to deal with one mortgage is very challenging when finances are bleak. Throw in another mortgage, as if working one lender was not difficult enough, and to deal with a second mortgage short sale can magnify the frustration times two fold. Short sale is basically when the amount expected from the sale of the home is less than the balance owed on the mortgage and the mortgage lender is willing to accept the payoff. For the most part, the transaction can be a win-win situation. It helps struggling underwater borrowers avoid foreclosure on one hand, and on the other hand, the lenders loss are also minimized because the property is not a foreclosure. It gets complicated with second mortgage short sale as you need co-operation from both the first and the second lender.

Before we get in to the details about short sale, let us first remember that when you sell your house, the loans go with the house. So if they deed their house to someone else, the loans stay in place. A sale of a house does not affect the loans on that house. Short sale works because the lender agrees to release its claim on the house at the closing table. So the new buyer gets the house free from your mortgage. But if you have two mortgages, the short sale is much more complicated. You may have one lender who has agreed for short and the house will be sold and still have a second mortgage on it. The buyer of your house would want to be free of both your first and second mortgage.

Now the question is when you have two mortgages to deal with, how do you short sale?

Here are a few ways in which you can deal with your second mortgage.

Sometimes the lenders who made the first mortgage also make the second. You may ask the bank if they can allocate the short sale proceeds to release both loans. You may suggest buying out the second. The bank may show interest as they are in a position where they will get nothing if it goes into foreclosure. You can offer them a small amount assuming you have some cash. It may help, as after all, they are already prepared to be wiped out. If you are cracking a deal like this, make sure you get the arrangement in writing including how they will report to the credit bureaus as you would want to avoid foreclosure appearing in your records and also that they will not pull you in the courts for it. Finally, they should clearly mention that the amount paid is towards the full payment of the second mortgage and forever clearing the debt.

Another option is for those who don’t have the cash to buy out their second mortgage. You may suggest a deal to your second mortgage holder wherein, you would ask them to release the second mortgage in order to allow the short sale to go through and in return, you will sign a note for a percentage of that loan. Such a note is a personal loan, an unsecured loan, and would be dischargeable in bankruptcy. But if you can manage the payments, a good outcome is assured rather than tarnishing your credit report.

These options are worth considering if you want to do a short sale and avoid foreclosure with two mortgages to deal.

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