If you decide to pursue a real estate short sale, be aware of the “non-purchase money” 2nd mortgage. A non-purchase money mortgage is one used for more than the purchase of the house. For example, a HELOC ( home equity line of credit) is a non-purchase money second mortgage. A HELOC may have been used to consolidate debt, take a vacation, or buy a new boat/car. In other words, the loan was for more than the house. In contrast, a purchase money second mortgage was taken out at the time of purchase process and used exclusively to buy the house.
Lenders holding the note for a HELOC are less likely to let the homeowner walk from the short sale process without repaying a portion of the loan. They know the homeowner will still enjoy the benefits of their debt consolidation, vacation, or new boat/car long after they sell their home on a short sale. Therefore, they feel the homeowner should take more financial responsibility. How? By signing a promissory note for up to one half of the second mortgage. Many times these promissory notes will be “zero” interest loans for up to 15 years to help the homeowner complete the short sale process.
Here’s the real problem: if short sale homework is not done up front to determine the intentions of the non-purchase money second mortgage lender and homeowner, we could find a short sale buyer only to learn the second mortgage requires a large promissory note. If the homeowner refuses to sign it the second mortgage holder will not sign off on the short sale process and the house will go to the trustee’s sale.