Mortgages & Creative Financing

Junior Lien Holders and Short Sales

79 Articles Written

The short sale has always been a tricky transaction. It’s a challenge to obtain the required paperwork from the seller. It’s a challenge to find a qualified buyer who is willing to stick around until the short sale gets approved. It’s a challenge to prepare the paperwork and to get the deal accepted by the mortgage lender(s). The challenge becomes even greater when there is more than one lien holder (more than one mortgage lender) for the property being sold in the short sale transaction.

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Traditionally, the first lien holder (the lender who holds the first mortgage) offers the junior lien holder(s) a small amount of money in order to release their lien. The first lien holder makes this offer because all of the liens on the property must be reconveyed at closing in order for the sale to occur. Junior lien holders may accept what is offered by the first lien holder.

You might wonder why a junior lien holder would accept, say $3000, when the loan balance is $100,000. The reason is quite simple: if the property is foreclosed upon by the first lien holder, the second lien may not get any money at all.

When I started working short sales, junior lien holders would take anything offered to them by the first lien holder: $500, $1000 . . . anything at all.

Increasingly junior lien holders have some strategies up their sleeves. If they want more money than is allotted by the first lien holder, they may ask for a cash contribution. Be careful to check with the first lien holder as to whether a cash contribution would be allowed. If it’s not permitted, you might find even more strategies up that lien holder’s sleeve.

Photo: flickr creative commons by minhimalism

    Replied almost 9 years ago
    Great insight on why second lien holders would be compromising. Short sales continually have more information and processes to take into account.
    Replied almost 9 years ago
    There are basically two approaches to negotiation with banks What most people are trying to do and failing at is by asking the bank to help them through a Charitable Contribution based on a hardship. As you know the old approach of just asking your lender for help does not work because banks are not charitable and they don’t care about any hardship you or I are going through. A more powerful option on how to get your equity back is through the use of real Material Evidence of Violations that exist in your loan today, then the Lender has no choice but to work with you to correct it. If Material Evidence of violations existing in your loan today then the Lender has no choice but to work with you to correct it, because you are entitled to a recourse of those damages as a financial restitution which you can you ask for in the form of a reduction in your mortgage principal balance. Private Mortgage Investigation has discovered that upwards of 80% of loans that were originated from 2001-2008 contain at least one serious violation which you can use to turn the table on your Lender in your favor.
    Replied almost 9 years ago
    Hi highly recommend all agents to find an expert negotiator to handle their short sales as it is a very challenging process. Experienced negotiators have seen and heard most of the 2nd lienholder’s strategies and know how to handle them correctly as opposed to the average Realtor who tend to compromise easily due to their lack of experience. Using the threat of foreclosure as leverage is only one of the tactics that experienced negotiators use. I suggest all homeowners to find their negotiators soon if a short sale is a viable option. Great article!