Profile picture for kylies

Want to sell but am upside down...

If I sold the house, the primary lender would be paid off; however the secondary lender would not. Could the secondary lender finance what I owe them into a new loan once the house is sold? Is this a stupid idea? I don't really want to short sell.

  • April 17 2012 - Los Angeles
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Answers (9)

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  • June 06 2012
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Since California law prohibits lenders from taking recourse against a borrower who has decided to do a short sale, your lenders would have to take any negotiated payoff as satisfied. Usually we negotiate all payoffs simultaneously between the lenders. While the 1st lender usually gets the majority of the payoff, something can always be negotiated with the 2nd to clear the debt as well. I have done this for many clients.

It is always a good idea to speak with a Real Estate attorney to get a full picture of how a short sale will affect you, if you must go that route.
  • May 16 2012
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Dear Kylies,
You can pay off the first lender and negotiate with the second. Hopefully the sale will cover most or all of what you owe. I would get more advice on this from an attorney who specializes in finance.

 In the State of California, a mortgage company is bound by "non recourse". This means a debt for which a person has no personal liability.
For example, a lender may take the property( or money from the house)  to pay the mortgage owed, but they have no recourse to go after your other assets.
not a stupid idea, and I dont' blame you about not wanting to short sell either.
Homes are selling well right now and we expect that to continue through the Summer as well.
  • April 21 2012
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Depending on the laws of California, a 2nd mortgage can be wiped out in a foreclosure and (depending on the loan) the lender may or may not be able to collect on the unpaid debt.

So.....often you can negotiate with the 2nd lender where they accept a fraction of what is owed.

As Chris points out, talk to an experienced real estate agent in your area to determine what you can sell the home for and also to help you negotiate with the 2nd lender. You might discover you have enough money from the sale to pay them both off. Or you can get the 2nd lender to take much less than what is owed. Just make sure you get it in writing.
  • April 18 2012
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Typically what you do is agree on a promissory Note. The terms of course are negotiable, and you should be able to get an attractive rate and in many cases a slight principal reduction for your efforts. It is a win-win for both sides, because doing Judgments rarely is profitable for junior liens and they rarely ever see the money. It benefits you having a reasonable loan that makes financial sense.

Just so you know, in Non-Recourse states (Minnesota is mine) the 1st lender has no recourse in a foreclosure situation, but all junior liens do have the right to pursue afterwards in the form of a judgment. Whether this will actually happen or not is anyone's guess. I have seen them both ways and really it just comes down to whether the attorney's acting on the junior lien's behalf believe it is profitable to sue.

I actually believe individuals with a 2nd mortgage are the best candidates for a short sale if they live in Non-Recourse states. Credit scores & length to repurchase are not that much different between foreclosure and a short sale if someone only has a 1st mortgage. One exception to this rule is if a person is able to negotiate a successful short sale while still being current on payments. However, it is difficult to justify a hardship when you are current keep in mind.

You can leverage your home to fully satisfy your debt obligation to the 2nd however. Typically what happens is you get a short sale approval from the first, and then they allocate $$$ towards the 2nd to release their lien rights.

Sometimes the 2nd may want more money, or they will demand a promissory note, but in a short sale situation you have the most leverage as a homeowner. I have seen 2nd's satisfy their debt with a homeowner for as little as 30 cents on the dollar. For a little effort you can be done with this and move on with your life. 

Worst case you still do a promissory note and the 1st has helped you out initially by contributing money towards the 2nd. 

Of course in many cases you still need to exhibit a Hardship, and short selling your home is stressful I will admit, but the payoff with Junior liens is big. 

I would reccomend speaking to a couple Realtors in your area that specialize in short sales, and try to team up with one that has an attorney negotiate the short sales for them. That way you are getting legal advice.

  • April 18 2012
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Profile picture for blue screen exile
Upsidedown?

Cal Worthington always seemed to do quite well selling "standing on his head" (upsidedown).  He stated he would stand on his head until his ears are turning red, and that people should go see him to buy a car truck or van.

By the way, California is a "non-Recourse" state, meaning mortgage holders cannot go after balance due if a sale didn't net sufficient revenue to cover a purchase loan.  A cash-out refinance or equity loan for other purposes can be different.

I wouldn't convert a mortgage loan to an unsecured loan in California if I could avoid it.  Especially as the interest rates of the mortgages are usually substantially better than unsecured loans.
  • April 18 2012
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Profile picture for hpvanc
You can approach them about converting it to a personal unsecured loan, it can't hurt to ask.  You could also look into getting an unsecured personal loan to cover the remaining balance due on the 2nd mortgage independently .  There are financial considerations to make on whether going the shortsale or letting them have it back in foreclosure with a hit to your credit and potentially curtailing your future earnings is the best longterm financial decision (for some people it is, for others it won't be).  That doesn't change the fact that you need to move, for whatever reason.
  • April 17 2012
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Profile picture for Ofe Polack
First of all, do you WANT to sell your home, or do you NEED to sell your home.  If you need to sell and you are upside down, you may need to do a short sale if your hardship satisfies the lenders.  Have you tried to get a loan modification from your primary lender?  Would that solve matters?
  • April 17 2012
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I would contact your first and second lenders and speak to them about what you are considering doing. A short sale is when the seller has NO money to bring to the table and no assets in which to make up the shortage. It sounds like you might not be in this situation. In this case the lender may consider modifying the loan to accommodate a sale of the upside down asset- but you would need to peak to thema bout this - and perhas your tax attorney as well. Goo luck!
  • April 17 2012
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