A short sale is difficult enough if you only have one mortgage.

But you can do a short sale with two mortgages, sometimes.

So what is a short sale, and how can it work for you if you have two mortgages?

A short sale is a sale of your house where the lender agrees to accept whatever the buyer brings to the closing table, and to release you from the mortgage even though the buyer's payment is "short" of the full mortgage balance.

For instance, if you owe $200,000 and your house is only worth $150,000, you could do a short sale. The buyer brings $150,000 to the closing. After real estate comissions and closing costs are paid out, $140,000 is left. The lender would accept this $140,000 and release the loan.

That does not mean the lender will just say "okay" and forget about the $60,000 that you are short. They could come after you in a civil court proceeding in many jurisdictions.

But this is negotiable. How the deficiency is handled — if the lender agrees to not come after you for their financial losses. In some cases they cannot come after you depending upon the laws in your state. In other instances they won't come after you anyway because as a matter of policy they won't.

And the lender may report the transaction as "paid - settlement" or "foreclosure" depending upon what you have negotiated with them.

So that's a short sale, in a nutshell. But what if you have a junior mortgage also? A short sale with two mortgages is more difficult.

If the same lender has both mortgages, then it might be easier to negotiate a short sale with two mortgages.

If not, here are two possibilities. You could offer the second mortgage holder a bit of cash in return for canceling the loan. Get the settlement in writing so they agree to not go after you and also so they agree to report favorably to the credit bureaus.

Or, you could sign a note for a partial amount of the second mortgage, in return for settlement. The note would be unsecured and the second mortgage holder would have something that you would be paying on instead of nothing.

Because if they do not allow you to do a short sale, the second mortgage will often be wiped out today in the foreclosure sale. The problem for you is that the second mortgage holder can come after you in court if they do not exercise their foreclosure rights. By signing a note (for part of the balance that you negotiate with them) you are helping yourself by making a short sale possible, and helping them because they are getting something instead of nothing.

Find out what short sale mortgage paperwork you need, and can the second mortgage foreclose if the first mortgage is current?

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