Second mortgage lenders dislike foreclosing on real estate almost as much as they dislike approving less-than-full-balance payoffs. However, if you make your lender realize that you are making the best offer possible, it may reluctantly agree to your proposal. A successful negotiation usually depends on at least two primary factors: The amount of your first mortgage and the fair market value of your home. While you need not have a first or second mortgage delinquency to ask for a small lump-sum payoff, without such a delinquency you will seldom get a "Yes." Unless interest rates have spiked since you got your second mortgage, there is no reason to accept less than full payment on an up-to-date loan.
Balance of First Mortgage Loan
A second mortgage lender wishing to foreclose on your property must pay off the first mortgage. If the first mortgage balance is large, second mortgage lenders must put out more money to eliminate the first lien in order to move into a "senior" position. They may or may not have the desire or the ability to tie up large amounts of money for months while waiting for the foreclosure process to finish and the sale of the property to reimburse them. Therefore, if your first mortgage loan balance is high, you may have a better chance of negotiating a small lump-sum payoff.
Fair Market Value (FMV)
The FMV of your property, combined with the size of the first mortgage loan, plays an equally important role. A second mortgage lender will examine the total loan balances outstanding versus the FMV of your property. The lender will also estimate the "fire sale" value of your real estate. If it forecloses, after paying off the first mortgage it will need to sell your now-former property to recover its investment. Typically, only people looking for bargains (fire sales) are potential buyers. For example, if the loan-to-value ratio (loan balances divided by fire sale value) is less than around 80 percent, the lender may choose to foreclose. When the loan-to-value ratio exceeds that percentage, as in down markets, lenders may negotiate a small lump-sum payoff to generate some loan balance recovery.
Explain that you cannot afford to make payments on your second mortgage. Be prepared, with documentation, to verify your claim of insufficient income. If your combined loan-to-value ratio for first and second mortgages is high -- 80 percent to100 percent -- remind the second mortgage lender that it will recover nothing if you declare bankruptcy or if it forecloses, since the home does not have sufficient current value. Agreeing to accept a small lump-sum payoff will generate some loan balance recovery for the lender versus none at all. Politely, but firmly, make your point as often as necessary to get the lender's attention.
When the real estate market is down, you can often offer a lump-sum payoff that equals only 10 cents to 20 cents on the dollar, according to the Pauley Law Group, PLLC. Your lender will not immediately accept this "short" payoff. However, if you have presented your circumstances properly, it may reluctantly agree to your proposal. During the negotiation, be clear, specific and factual with your presentation. If you convince the lender that your small lump-sum offer is the best outcome it is likely to enjoy, it may accept your deal. For example, offering $20,000 on a second mortgage balance of $100,000, saving lender foreclosure costs of money and time only to receive zero dollars, is an attractive option it may not be able to ignore.