Short Sales With Multiple Mortgages

It's more difficult to complete a short sale if you have more than one mortgage on your home; but not impossible.

In a short sale, you sell your home for less than the total debt remaining on the mortgage; the proceeds of the sale pay off a portion of the mortgage balance. The lender accepts the "short" amount to satisfy the debt and releases the mortgage lien. Short sales are one way borrowers can prevent a foreclosure.

To complete a short sale, the lender must first approve the transaction. The homeowner generally must submit a loss mitigation application—which often includes a financial statement, proof of income, tax returns, bank statements, and a hardship affidavit or hardship letter—to the servicer, along with a copy of the purchase offer from a potential buyer. If the lender approves the short sale application and only one mortgage is on the property, the short sale goes forward. But if the home has more than one lien, like a second mortgage, tax lien, HOA lien, or home equity line of credit, the short sale process gets more complicated.

How Short Sales with Multiple Liens Work

To get clear title following a short sale, the first mortgage lender must get releases from all other lienholders. So if a second mortgage, tax lien, or home equity line of credit is on the property, all have to sign off on the short sale deal—not just your first mortgage lender. But it's often not in the other lienholders' best interest to accept the short sale.

Example #1. Let's say you have a first mortgage on your property for $160,000, a second mortgage of $30,000, and a $10,000 home equity line of credit. You find a buyer who's willing to pay $150,000 for the property. Generally, all of the $150,000 would go to the first mortgage lender, while the second mortgage lender and home equity lender (the junior lienholders) would get nothing from the deal. For this reason, the second mortgage lender and home equity lender would rather not accept this short sale deal and release their lien.

For them, it would be better for the foreclosure to go through and later sue you for the amounts owed. Even though the junior lienholders might collect only a small percentage of what they're owed by suing you, this option is better than totally releasing you from liability as part of a short sale. For this reason, junior lienholders often refuse to approve short sales. And, if all lienholders don't agree to the sale, the short sale can't close.

Example #2. Let's say you have a junior HOA lien on your home and want to do a short sale. The HOA will have to release it for the short sale to go through, just like any other junior lienholder. To get the HOA to release its lien, your mortgage lender will have to give up a portion of the short sale proceeds to the HOA. Usually, the amount offered is less than the total debt owed. A problem can then arise when the HOA wants the debt paid in full, but the lender doesn't want to give it any more of the sale proceeds. If the HOA refuses to accept the amount your lender offers, the short sale could fall through.

To convince the HOA to accept the amount offered by the lender and agree to a short sale, you might argue that completing the short sale is an easy way for the HOA to get some money with little effort on its part. Because collecting the debt on its own could be time-consuming and expensive, a short sale might be the easiest way for the HOA to get a portion of the money owed. You can also make the case that if the HOA will accept a reduced amount and allow the short sale, it can avoid the problems associated with an empty, foreclosed property in the neighborhood. Vacant properties tend to fall into disrepair and can attract vandals. But a person who buys a property in a short sale will likely maintain the property and will also start contributing dues to the HOA.

Incentives for Junior Lienholders to Accept a Short Sale

To incentivize junior lienholders to agree to a short sale, the first mortgage lender must determine an amount it's willing to give to each of the junior lienholders to release their liens.

Building upon the scenario in Example #1 above, let's say the first mortgage lender offers the second mortgage lender $10,000 and offers the home equity lender $2,000 from the short sale proceeds to approve the deal. Will the junior lienholders accept these amounts and allow the short sale to proceed? Maybe. The second mortgage lender and home equity lender might feel that accepting these amounts is the easiest way to recoup some of the money they lent to you and agree to release their liens in exchange for these funds.

But what if the home equity lender insists on receiving $5,000 to approve the short sale, and the first mortgage lender has only offered to give them $2,000 from the short sale proceeds? Even if the first mortgage lender refuses to allocate more of the short sale funds to the home equity lender, the deal isn't dead. The extra $3,000 can sometimes come from the buyer or seller if they have it.

Completing a Short Sale with Multiple Liens

The main issue in getting multiple lenders to agree to a short sale is that each party wants more money than they're getting, and nobody really wants to share. So it can be tough to get an approval from each lienholder. Generally, while none of the lenders gets as much money as they would like from a short sale, in the end, short sales are often approved because it is the easiest way for all lienholders to collect something on the debts.

In the end, while it might be more challenging to complete a short sale when multiple lenders are involved, convincing all lienholders to agree to a deal isn't impossible. As long as each party receives sufficient proceeds from the short sale, junior lienholders often have little to gain by letting a foreclosure go through and will approve a short sale deal.

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