Short Sale Process for Multiple Mortgages

A short sale is an alternative to a foreclosure on your property when you are behind on your mortgage payments. Multiple mortgages on one property make a short sale possible, but the process is more complicated.

What Exactly Is a Short Sale?

The property is sold for less than the remaining mortgage balance in a short sale. The lender agrees to release the mortgage lien in exchange for the sale proceeds. Therefore, releasing the mortgage lien will prevent foreclosure.

In real estate, a short sale occurs when a home is sold for less than what the homeowner owes on the mortgage. These are usually sales that are used as a foreclosure alternative, and in many cases, the seller is in default with their mortgage loan. Even though the borrower may end up with a negative credit report, short sales may benefit borrowers because they may be able to avoid various fees associated with the foreclosure.

Deficit judgments are used to recover any unpaid balances owed to lenders. In case of deficiency judgments, lenders can offer their debtors a chance to repay debts owed. Other states have anti-deficiency laws that prevent a lender from collecting more than what was put up as security for the home.

What Is the Short Sale Process with One Mortgage?

A short sale can only be initiated by the homeowner-borrower negotiating with the lender. After the short sale is approved, the homeowner-borrower must submit a loss mitigation application to the lender. To complete the transaction, the homeowner-borrower must find a buyer for the property.

What Is the Short Sale Process with Multiple Mortgages?

Multiple mortgages complicate the short sale process. Multiple mortgages include tax liens, second mortgages, and home equity lines of credit.

To approve a short sale, a senior lien holder must notify the junior lien holders and get them to relinquish their interests. Junior lien holders, however, do not have any incentives to do so. To convince the junior lien holders to do so, the senior lien holder offers them a share of the short sale proceeds as a compromise.

What Are Some Legal Issues to Consider with Short Sales?

A short sale can sometimes be a high-pressure transaction that involves many different legal issues compressed into a short period of time.

Some legal issues to consider with a short sale may include:

• Approval: The lender needs to obtain a “best-price offer” analysis (BPO) before a sale can be approved. In this way, the home will be sold at its best market value. The approval process can sometimes delay short sales.
• Taxes: Short sales can have various tax implications for both the seller and the buyer. Other areas, such as credit and title, may also be affected.
• Fraud: Short-sale fraud has become common in the past years. Various types of short-sale fraud are perpetrated, such as the use of false documents, fake certification IDs, and dishonest appraisals.

Legal documents and forms should always be reviewed carefully before signing when dealing with short-sale legal issues. By doing so, you will gain a better understanding of which agreements should be formalized.

What Are Other Foreclosure Alternatives?

In the event that a borrower has exhausted all of the alternatives provided in the above section, they may have to pursue another foreclosure option. In many alternative foreclosure options, the borrower’s ownership rights in the property will be transferred to another party. Other foreclosure alternatives may also be used when a borrower no longer wants to own the property.

Some common examples of other foreclosure alternatives include the following:

• Deeds in lieu of foreclosure: This transaction is often used as an alternative to foreclosure. It allows the borrower to return the deed to their home to the lender in exchange for being released from their mortgage. A borrower must first ask their lender if they are willing to accept a deed in lieu of foreclosure. This is because the remedy does not apply automatically or without the borrower’s permission.
• Short sales: A short sale is when a borrower sells their house at a lower price than the amount they still owe on their mortgage. As a result, the homeowner will not be able to pay off the remainder of their mortgage loan from the sale. The lender may either forgive the remaining balance or require the borrower to repay it over time.
• Pre-foreclosure sales: A pre-foreclosure sale may occur when a borrower defaults on their mortgage, but their lender has not yet initiated the corresponding foreclosure proceedings. To satisfy their mortgage loan debt, a borrower will sell their property. By doing so, the borrower will avoid not only a foreclosure action, but also the associated costs.
  • A pre-foreclosure sale differs from a short sale in that the borrower may not necessarily have to sell their house for less than what they owe.

How Has COVID-19 Affected the Foreclosure Process?

In general, foreclosure regulations are governed by state laws. As a result, foreclosure laws vary greatly from state to state. Several federal laws and administrative agencies have stepped in to help curb the negative effects of COVID-19 on foreclosures.

Although some states were worse affected than others by COVID-19, the following examples demonstrate how the pandemic has changed foreclosure procedures nationwide:

• Mortgage lenders have extended many borrowers’ deadlines to make mortgage payments.
• Mortgage lenders have also been more willing to renegotiate or modify borrowers’ mortgage terms.
• A handful of states have enacted further protections for borrowers in danger of having their property foreclosed on and being evicted.
• Federal laws have suspended mortgage lenders’ usual practice of reporting missed payments to consumer reporting agencies, which in turn, has protected many consumers’ credit scores.
• Overall, it has reduced the number of foreclosure actions.

For further information on how COVID-19 has affected the foreclosure process in a borrower’s state, they should consult a local foreclosure attorney.

Are There Any COVID-19-Related Foreclosure Alternatives?

The following are some other COVID-19-related foreclosure alternatives that a borrower may be able to request or use:

• To extend the date that a mortgage becomes due;
• To lower the interest rate or the amount of monthly installments;
• To set up a balloon payment without interest that is due when the mortgage term ends;
• To receive enhanced financial assistance through various government-sponsored loan programs;
• To obtain a zero-interest, COVID-19 standalone partial claim;
• To get a loan reduction or COVID-19 recovery modification; and
• Various other payment reduction options that can be found under individual federal and state programs for people who have suffered a financial hardship due to COVID-19.

Do I Need a Foreclosure Lawyer?

An experienced foreclosure lawyer can help you negotiate a deal with both senior and junior lien holders. If you fail to do so, your property will be foreclosed upon and the foreclosure will negatively affect your credit score.

Forbearance, reinstating your loan, or modifying the terms of your mortgage loan agreement can be handled by an attorney with foreclosure experience.

Additionally, your attorney may recommend other options besides foreclosure that may be more appropriate for your particular situation, such as a pre-foreclosure sale or a deed in lieu of foreclosure. Your attorney can also represent you in court or in negotiations with your mortgage lender during legal proceedings.

Last but not least, the pandemic has heavily affected both state and federal foreclosure laws. Your foreclosure attorney may be able to tell you about any changes made to your state’s foreclosure process.