How Boston Short Sales Differ With a Home Equity Line of Credit

How will an equity line of credit affect your chances of obtaining a successful short sale in Boston?

The differences between a short sale, standard second lien, and an equity line of credit can be a sticking point with some banks. Many customers are concerned that a line of credit will prevent them from obtaining a short sale or even worse that a deficiency judgment may be pursued.

According to Foreclosure University, “if the line of credit is secured by the property. Most homeowners have a home equity line of credit that takes a 2nd lien position on their home. If the home is foreclosed on by the 1st lien holder and no one bids, the 2nd is wiped out, and has the option of 1099 the homeowner or file a deficiency judgment.”

Because the line of credit can more easily be ‘detached’ from the home by the lender issuing a new promissory note, bank reactions to the HELOCs vary. For example, there is a general consensus around the water cooler that Bank Of America’s HELOC 2nd lien payoff standard is 5% of the net proceeds.

I’ve worked with several banks that will treat the LOC just like a second lien (usually requiring 3% of net proceeds). However, since a LOC can be used to purchase things not technically related to the home some banks will require a new note to be signed. Banks have become more cooperative with the HELOCS in the past 18 months.

They are starting to realize that if a client has their home foreclosed upon the HELOC may never be repaid.

Chase’s policy is tougher on second liens compared to some of the other banks. Chase differs because they run matrices on the net proceeds (similar to Bank of America) instead of basing their decision on the amount of loss.

The calculation goes that if the 1st lien captures 80-90% of fair market value they will approve the sale. In the case of a second lien or HELOC Chase will usually ask for that other 20-10% of the net proceeds.

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