Making a Short Sale with Multiple Lenders

In order to gain approval from your lender, you’ll have to submit a short sale “package” so your lender can decide if you qualify. The package will typically need to include proof of your income and assets, copies of your tax returns for the previous two years, a listing agreement and purchasing contract, as well as, a hardship letter. You can read more about hardship letters and how to create one in our “How to Put Together an Effective Hardship Letter” article.

If your application for the short sale is approved by your mortgage lender, you can proceed with the process. However, having multiple lenders on your home can complicate the process. If you have multiple debts on the home such as a second mortgage, a home equity line of credit (HELOC), or have given up equity to any other form of lender like a credit company, the short sale must be approved by each and every one of them in order to proceed.

While having multiple lenders does certainly complicate the process, it doesn’t immediately disqualify you from securing short sale approval. When liens are put against a home, the order in which the loans are given places lenders in a priority order. The “senior” or first lien holder has the first right to money gained from liquidation of the debt collateral (your home). “Junior” lenders secured equity in the home after them, so they’re essentially stuck with the leftovers. Since the home is already being sold at a loss to the first lender, there wouldn’t be additional money left for junior lien holders to cash in on.

Since lenders are in the business of losing as little as possible, junior lien holders will likely refuse to release their liens unless offered a buyout to recoup some of their losses. Since all junior lenders must release their liens for a clear home title, the senior lien holder will have to offer to share the sale proceeds. The main hurdle here is that you have a finite amount of money being split between several lenders and everyone is trying to maximize their takeaway. Let’s take a look at an example scenario:

Example Part 1:

Let’s say that you have three separate liens on your home. You have a primary mortgage debt of $180,000, a second mortgage debt of $40,000, and a home equity line of credit of $10,000. This totals up to $230,000 in total debt owed on the property. During the short sale process, the largest offer you could secure was for $175,000. If you factor in about 5% for closing costs, you must deduct $8,750, leaving $166,250 in proceeds from the sale. Normally this entire $166,250 would go to your primary lender. The primary lender is more than satisfied by this amount, but it doesn’t leave any meat on the bone for the other two lenders. The primary lender may then offer some amount to the other junior lien holders and hope they accept. The primary lender does not have to offer anything to the remaining lenders, in that case the junior lien holders must agree to their full loss in writing. IF, and once they do agree, the primary lender may approve the short sale if the ‘short sale package’ is complete and satisfies all of the lenders qualification requirements. In a rare instance, to minimize their losses, the junior lien holders can and may refuse the short sale and may later sue the homeowner for a percentage of their debt obligation after the foreclosure.

Although this poses a potential roadblock to making a short sale, there is a solution: negotiation. If you can convince the primary lender to spread the wealth from the sale proceeds, you may be able to offer each lender an acceptable payoff to satisfy them. The foreclosure process is not only undesirable for the homeowner, but also for the lenders. The process can be time consuming and expensive to debtors, so if they’re offered a preferable option, they’ll often take it. During your negotiations, you can improve your chances of approval by making the short sale more desirable than a foreclosure to all of your lenders.

Building upon the above example…

Example Part 2:

The Junior lien holders demand some form of compensation in order to release their liens. Hoping to complete the short sale and still maximize their takeaway, the primary lender agrees. Out of the $166,250 gained from the sale, the primary lender is willing to pay the second mortgage lender $15,000 and the home equity creditor $5,000. This leaves your primary lender with $146,250, a noticeable reduction from the $180,000 that they’re owed. However, they estimate that a foreclosure would cost them about $50,000 to complete. If they chose to go that route, they would only bring in $130,000. Since the short sale still nets them more compensation, even while paying out the other lenders, they’re satisfied with the decision.

The second mortgage lender is only walking away with $15,000 of their $40,000 loan, however, a foreclosure would allow the primary lender to seize the property, wiping out the second lender’s loan entirely. The second lender could then sue the homeowner for a deficiency after the foreclosure. This would allow them to recoup some of their losses, but they calculate a similar payout from both situations, while needing to allocate more time and resources to gain it through legal action. For those reasons, they agree to the short sale terms.

The lender of the home equity line of credit is to receive $5,000 of their initial $10,000 loan. They calculate that they will likely only gain about $2,000 if they choose the alternative option of suing the homeowner after a foreclosure. To maximize their recovered losses, they agree to the short sale terms.

This, of course, is just an example of a possible situation; the numbers and reactions of lenders will always vary. It simply serves to exemplify how lenders may be satisfied with seemingly low offers relative to what they are owed. The reason for this behavior is because, as we mentioned before, foreclosure is essentially a lose-lose situation. It’s costly to the lenders in the form of both their time and their money, so they might not be as difficult to satisfy as you think.

If one of the several lenders does refuse what they’re offered, but the other lenders are unwilling to take less money, you also have the option to offer them an out of pocket cash sum or to sign a long-term promissory note for the additional money they desire. This is just another example of how you can flexibly work around stubborn lenders to make the short sale work.

Some lenders may request a hardship affidavit rather than a hardship letter. Although the two items serve the same purpose and require essentially the same information, they are a little different. The affidavit is a form to be filled out rather than a letter to be written. In addition to the boxes that must be checked off, some affidavits also contain a short section for an explanation near the bottom. Affidavits are also considered sworn statements, so lying on them carries heavy legal consequences. Be sure to check with your lender to see which they require as part of the short sale package before starting on a letter.

In these multiple lender short sale closings, the closing costs may be different than you first expect. The lien holders will usually do whatever they can to minimize costs and maximize their takeaway. This means that they may attempt to renegotiate your real estate agent’s commission, as well as, refuse to pay some of the necessary fees. This could include your roof, sewer, and/or pest inspections. They’re also likely to deny buyer requests for things like a home warranty plan, a closing cost credit, or any requested repairs. If neither the lenders nor the buyer is willing to pay for these things, you may get stuck fronting the bill. If that happens, you’ll either have to pay out of pocket or assume the debt associated with having those things completed. If paying out of pocket is not an option, and often the sellers simply do not have the cash, we can release the contracted buyer and look for another buyer willing to accept whatever issues need to be addressed. It’s good to keep these potential hiccups in mind from the beginning of the process so that you aren’t blindsided by them late into the short sale. Short sales are extremely unpredictable and can take several tries to get them right.

So, while completing a short sale with multiple lenders is a more complicated negotiation than with a single lender, they’re definitely still possible. Aligning yourself with a competent real estate agent is critical. Our success rate is significantly higher then the national average. Although processing a multi-lender short sale is much more difficult, we have the necessary team in place to maximize your chances. No one wins in a foreclosure, not you and not the lenders. From your perspective, short sales are much less detrimental to your credit and allow you more options when trying to secure a new home in the future. As a lender, the short sale will allow them to recoup more of their losses than a foreclosure could, while also avoiding the unpleasant legal procedures. If you can establish a mutually beneficial deal for all parties involved, there’s no reason that you can’t complete the sale.