Short Sale Home » Featured, General Short Sale Info » What Happens When There Are Two Loans in a Short Sale?

Doing short sales are quite hard, but can get even harder when there are 2 loans involved. You know need 2 lenders to cooperate, not just one. Double trouble.

The 2nd mortgage lender will always be in the 2nd position, even though the 2nd loan is a home equity loan. The lender who is in the first position will receive the funds collected from the foreclosure proceedings when the Notice of Default is filed.

In many parts of the country, the 2nd lender must make up back payments to the first lender to pay the 1st lender’s cost to file the Notice of Default and associated expenses and then file its own Notice. If the 2nd lender does not do this, they could get wiped from the foreclosure proceedings and receive nothing (especially if there is little money to go around in the first place).

When the 2nd lender receives a notice which states the 1st has foreclosed, many 2nd lenders do not initiate their own foreclosure proceedings since there may not be enough equity leftover to make the cost of foreclosures profitable.

When a short sale is used to avoid foreclosure, the seller would have signed a listing agreement with a real estate agent.

To reduce closing costs, lenders will usually refuse to pay the following:

• Home Warranty Plans
• Pest Inspections
• Roof Certifications
• Sewer Inspections
• Repairs
• Buyer’s Closing Costs (Credits)

Now, the 1st lender will offer the 2nd lender a small amount to go forward with the short sale transaction, sometimes by offering as little as $1,000 to a loan balance of $55,000.  If the lender refuses, they could end up getting nothing in the end – it’s a risk.  But many 1st lenders are happy to receive at least 90% of the loan, leaving the 2nd a bit more money…sometimes $4,000 or $8,000.  The 2nd lender must agree to release the loan, if not the short sale will be denied and the first lender will probably put the property into foreclosure eliminating the 2nd loan.

Tags: short sale loans, two loans, two mortgage loans short sales