2nd Mortgage

How will the second mortgage on a home affect the short sale foreclosure process? Is it to the investors advantage if there is a second on the house? I have heard that there are benefits to this, but need to better understand why?

A second mortgage on a short sale is like having a big lever that works in your favor. The second mortgage is an inferior position to the first mortgage and will likely lose their entire investment if the property actually goes into foreclosure. Therefore they are inclined to accept whatever money they can get from the short sale.


So for the fact that there is more outstanding debt on the property due to the second mortgage, do the banks or lenders feel there will be a greater loss and waive the second mortgage in a way?

Who takes a hit on the second? The lender, homeowner or both?

Thanks again

The 2nd mortgage doesn’t necessarily increase the debt on a property it just segregates part of the debt to an inferior position. That inferior position will lose 100% of its investment if the property is foreclosed upon by the first lienholder. So right away in a declining market with a defaulted 1st and 2nd and the 1st threatening foreclosure the 2nd is inclined to take whatever they can get. Their alternatives are to sit by and watch everything disappear or buy out the 1st lienholder thus throwing good money after bad. In a SS situation if the property value has declined sufficiently you can likely get the 2nd to release its lien for a paltry sum.

I recently heard of a SS strategy that consisted of looking for homeowners with large seconds on their properties that are going to foreclosure. Usually a large second would=instant equity if you can negotiate them down or at least get them to release the lien so that the primary can be shorted. Remember that some will release the jr. lien for a small amount even if they continue to pursue the homeowner for the remainder. Try to get all debt relief forgiven but if you cannot, at least you will be saving the home from foreclosure.

So then even though there is a second pushing down on the homeowner, as an investors we only need to concentrate on the first, to negotiate and worry about right? Overall, there is nothing to fear about the second and in fact it should be welcomed since it better assists with our needs. Is that correct?

The second mortgage gives you further leverage and potential savings but you must still negotiate with the second to get them to release their lien and not pursue the homeowner for any deficiency.

Sorry for all of the back and fourth on this topic. You’re feedback has been very helpful, but I have one last question.

Do you have the ability to negotiate the 2nd out of the picture completely?

Yes, if your numbers are well documented and the 1st mortgage is in default then you can convince the 2nd lien holder to release their lean for a grand or so. If they reject the offer and the property goes into foreclosure they get nothing.