Bills Logo

Selling Home

image alt text
Mark Cappel
UpdatedJan 14, 2010
My new spouse and I each own a house and would like to sell them and buy a different one. How do we negotiate the mortgages?

I am current on all my debts, including my 1st & 2nd mortgages. However, I married last summer, and we both owned our own homes. We're attempting to sell both, and buy a new house in the next 1-2 years. My question is, the first house we are selling has seen its value decrease, and is worth approximately only 95% of the loan value. With realtor's fees, and assuming a sale price less than what I owe, I'm looking at approximately $10,000 in residue debt after the sale. With the goal of purchasing a new home in the future, I want to be able to take out a loan to cover this remaining balance, however, due to a past divorce my credit score dropped to the mid-600s, and I don't believe I'd qualify for an unsecured personal loan for that. So, I have three questions: 1) Which of the two mortgage companies (1st owed $48k, 2nd owed $34k) should I approach about a residual/remaining balance loan, and 2) Are mortgage companies such as Countrywide and Ditech (old names used...sorry!) likely to issue an unsecured loan for a remaining balance? 3) Should I contact them before or after the house is under contract for sale?

I do not believe it is reasonable for you to expect to find a loan for the anticipated deficiency balance resulting from the sale price of the property below the balances of the first and second mortgages. Therefore, your most reasonable course of action is to press the junior mortgagee into accepting a lump-sum settlement of this loan. Once the second mortgage is lifted, you will be free to sell the property at the market price.

Let us review your situation and look at my analysis in detail.

First, I suggest you read my answer to a fellow reader regarding Second Mortgage Foreclosure so that you understand the current landscape for second mortgages, foreclosure, and the challenges of selling a home.

Second, some states have laws that prevent mortgage lenders from collecting a deficiency balance from borrowers who are foreclosed upon or otherwise walk away from their home mortgages. See Advice on Bankruptcy and Deficiency Balance on a Second Mortgage to understand more about this issue.

Finally, if you do allow one or both of the properties to go into foreclosure, and there is a deficiency balance, that debt is unsecured. You can negotiate the unsecured debt yourself or hire a company to do it for you. See Negotiating Debt.

Regarding your first question, the junior mortgagee(s) are in the most vulnerable position because becaue if you default and allow a foreclosure, the foreclosure destroys all interests that are junior to the mortgage being foreclosed. It does not make economic sense for a junior mortgagee to redeem the first mortgage because property values in many areas are far lower than the mortgage balances on the attached properties. As a result, most junior mortgagees are willing to make a lump-sum settlement with a financially distressed debtor because the alternative is to recover zero in a foreclosure and bankruptcy.

Regarding your second question, I am unable to speak for mortgagees. My guess is it would be unlikely they would accept an offer to convert a secured loan into an unsecured loan regardless of your credit score. The fact that you have a less-than-perfect credit score makes it more unlikely that you will find a lender to take this risk.

Regarding your third question, my guess is that once you start shopping your local market you may find it difficult to sell your properties at the price you desire. Consider a short-sale or deed in lieu of foreclosure if you are unable to sell the property in a conventional sale. Alternatively, as I mentioned, if you resolve the second mortgage and lift it from the property, you will have more price flexibility.

I hope this information helps you Find. Learn & Save.