The Vanishing Golden 1 Second Mortgage Loan in a Short Sale

That Golden1 short sale with a second mortgage? It can be like a case of now you see it, now you don’t. Second lenders in California are often fairly creative in how they deal with California Civil Code 580e. But these are generally hard-money loans we’re talking about. Hard-money loans can carry recourse, especially as second loans that could be wiped out in a foreclosure. This is the thing people don’t stop to think about because they’re often not made to realize the consequences of tapping a home equity line of credit or taking out a second mortgage.

Wouldn’t it be nice if homeowners would receive a disclosure upon refinancing that explained hard-money loans to them, and how they are changing a non-recourse loan into a recourse loan, like in big red letters? Something that said: Warning! By signing these loan documents, you are giving the bank the right to pursue you to the ends of the Earth to collect this debt in the event of default. You can be held personally responsible for this debt to the extent it exceeds your previous purchase-money mortgage.

But, no, they are entranced by low interest rates dangling in front of their faces. Not to mention, they probably need the money for something else. And they don’t think about this hard-money loan until they are facing a short sale or foreclosure. If the lender won’t play ball with them, they might need to pay it off in full or in part. Not every second lender is reasonable in a short sale. There are limits to how much a first lender will give them. If they’re like The Golden1, that amount might not be enough. So, The Golden1 might refuse to do the short sale unless the seller negotiates with them outside of escrow.

That’s because a seller cannot be made to contribute to a short sale in California, and some first lenders won’t allow a contribution by the seller to the second even if the seller offers it. Oh, you can have the buyer offer to pay a shortage but sometimes the first lender will refuse to let the buyer pay the difference between the amount The Golden1 demands and the amount offered by the first lender. Or, maybe the buyer’s own mortgage lender won’t let the buyer pay it.

The best way to negotiate with The Golden1 is before you even start your short sale. However, it is possible that the first lender will not object to a second loan suddenly disappearing from the HUD statement. You would think a bank would say: hey, wait a minute, buddy, if you’ve got money to pay off a second loan, we want that money. But not necessarily. Sometimes, the bank will just close escrow and not look sideways.

Search all Sacramento Short Sales.