Expert: Dick Dennis - 9/22/2008

Question
QUESTION: Hello Dick,
I saw one of your answers and thought you may be able to help me.  I own a home in NJ which has been on the market for 18 months.  I moved to IL due to a job so, the house has been vacant for about 18 months.  I have 2 offers from the buyers with lesser amount than my total mortgage balance.  My first mortgage balance is $300K and the second mortgage (equity loan) balance is $180K.  Current highest offer is $360K.  I contacted the first mortgage and explained that I can no longer afford the payments and they told me to send in the offer I got from the buyers.  There has been no answers...  I have been trying to make payments and never exceeded 30 days past due.  However, I now can't make the payments anymore.  I'm about to give up now and let it foreclose...  I am going to stop making payment to my first mortgage.  What happens to my second mortgage?  Some are telling me to continue to make payments and some are telling me not to.  How will the second mortgage come after me to recover their loss?  Please help me Dick.  Thank you.

ANSWER: You are in a short-sale position, Anne. That means if the lender has to accept the purchase agreement then the lender accepts a lesser amount than what is due. However, if you do not pay on the first mortgage, the second may foreclose BEFORE the first does. They would have to in order to protect their interest in the second mortgage position, even if you continue to make payments to the 2nd, which I would not suggest you do if you stop paying the first.

You should be working with a Realtor who knows how to handle this short-sale situation. If not, go find one who does. If your sale goes through then you may get a 1099 from the second next year requiring that you pay the IRS. But you may be in a position, based on the new laws signed by Bush, where you would not have to pay that. I recommend you talk to a CPA or tax expert who knows which direction you should go. I do wish you well.

Dick Dennis

---------- FOLLOW-UP ----------

QUESTION: Thanks Dick.  I have a realtor who has not been very helpful...  My concern of finding other realtor is that I am financially not capable of making any more payments.  I can't start this process all over again.  My situation has been notified to the first mortgage bank and they asked me to send in all the offers I received.  That was almost 2 months ago.  The bank has not been responding to any of my inquires...  Bottom line is...  will a new realtor take this case?  Do I need to continue to make payments to be able to short sale my house?  Thank you again.

Answer
In a short sale situation, the lender always takes their time about these things. If you stop making payments, then it won't make any difference to you AND the lender. They know they are losing money on your loan, so you just have to wait. Plus, with the new FHA rules and the way the government says they will handle "bad" loans, chances are you will be able to stay there "rent-free" for a while. Take care.

Dick Dennis