Are you having trouble making your second mortgage payments? If your home has lost much of its value since you bought it, and you now find yourself “under water” with total loans that exceed the market value of your home, then you are not alone. Many people are distressed and searching for an alternative to foreclosure.
Perhaps you have already tried contacting the banks to inquire about a short sale or loan modification, but have not gotten a satisfactory response. If that is the case, an alternative strategy may be to make a settlement offer to the bank holding your second mortgage.
There are many major banks who have settled some of their second mortgages for pennies on the dollar. In practice, they accept a payment of only a small percentage of the total amount owed, and in exchange, they release the lien against the property.
Follow these steps when communicating with the bank:
- Make a first offer, in writing, for 5% of the total amount owed.
- After you receive a response, raise your offer to 10%.
- You can always offer more at a later date, if that is acceptable to you.
- Remind the lender that they are likely to receive nothing if they foreclose, after the first mortgage gets paid off.
- When a settlement is reached, secure a written promise that they will release the lien on your home.
If these negotiations are successful, then you will have only one bank remaining to deal with — the one holding the first mortgage. It should then be much easier to arrange a short sale.
Before starting any negotiations of this type, your second mortgage payments should be at least 120 days late. And remember that the bank can issue a tax Form 1099-C for taxes due on the amount of the debt forgiven. Check with the IRS (Publication 4681) for details. If you meet their test for insolvency, then you may not be liable for taxes on the forgiven amount.
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