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.

A deficiency judgment lets a lender try to collect any unpaid balance that remains after the sale. Some states allow these judgments after a short sale. Other states have anti-deficiency laws that stop lenders from collecting more than what the home sold for. In many short sales, the seller can ask the lender to waive the deficiency in writing as part of the deal.

What Is the Short Sale Process with One Mortgage?

A short sale starts when the homeowner-borrower contacts the lender and submits a loss mitigation application. The lender reviews the application before it approves the short sale.

To complete the transaction, the homeowner-borrower must find a buyer, and the lender must approve the buyer’s offer. Because this process only involves one mortgage, there is only a single lender, making the approval process faster than when there are multiple mortgages involved.

What Is the Short Sale Process with Multiple Mortgages?

Multiple mortgages complicate the short sale process. A property can have more than one lien on it, such as a second mortgage, a home equity line of credit, or a tax lien.

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. In order for the sale to go through, all of the lien holders must agree to the settlement amounts or promissory notes they are provided.

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 usually orders a broker price opinion (BPO) or an appraisal before approving the sale. This helps confirm the home is selling at a fair market price. 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?

If a short sale does not work out, a borrower may need to pursue another foreclosure alternative. 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.

Are COVID-19 Foreclosure Protections Still Available?

No. The federal COVID-19 foreclosure protections have ended. The federal foreclosure moratorium expired on July 31, 2021. Pandemic relief programs, such as COVID-19 forbearance and COVID-19 loan modifications, were phased out in the years that followed. Foreclosures now follow standard state and federal rules.

Borrowers who are struggling can still get help through standard options. These include forbearance, repayment plans, loan modifications, and payment deferrals. Contact your loan servicer to ask which options you qualify for. Some states also have their own homeowner protections, so check your state’s current laws or speak with a local foreclosure attorney.

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.

Take advantage of the no-cost lawyer-matching services provided by LegalMatch today to find a foreclosure lawyer in your area who can help you with any short sale concerns or needs you may have, whether you have one mortgage or multiple mortgages. They can help you determine the best way to handle your current situation and ease some of the stress of going through the legal process by providing guidance and assistance.