Responsible for Second Mortgage in a Short Sale

ln a short sale situation, am I responsible for the second motgage?

2 Answers

If you are the one short selling, you are responsible to make arrangements and gain permission from all lien-holders. Some second lien holders will bow out for a very small amount of money, some will agree to convert the lien to an unsecured debt (meaning you can sell the home and then pay off what you still owe monthly as you were before), some will hit you with a judgment for the difference.

The short sale agreement that the lender sends - that is, their official statement of what they allow - usually spells this out. Read it closely. If you have an agent working this aspect of the transaction, make CERTAIN THAT YOU GET A COPY OF ALL THE DOCUMENTATION. I have seen some really poor arrangements that did not benefit the short-seller at all, but left their credit in shambles and their debt load out of control.

In some cases, you may be required to claim the amount "shorted" - that is, the lien holder's loss - as income on your taxes. Check with your tax advisor to see as to how this may affect you, this can be a very, very unpleasant surprise if you don't plan for it.

This is one of the most plaguing questions you can ask.  As a lawyer, I address this on behalf of 3-5 clients per week.  It all depends on the extent to which your state has anti-deficiency laws on the books, and whether the banks [they are mortgage servicers of course, as banks don't write mortgages] are willing to waive the deficiency. 

A large number of mortgage servicers are quite sneeky about this.  They say the will accept partial payment on the second, of say, $3000 and use 'weasel' words, a legal term, in the escrow papers to allow them to sue you.  Some are so underwater that they just turn it over to collection agencies and waive any right to foreclose because the first is owed much more than the property is worth.  The situation is expected to worsen before it gets better.  I have heard, [but do not believe] that 48% of the homes in this country will be under water by 2011, and I don't mean as in a hurricane.  

If you are facing a similar situation, contact an attorney in your area.