Another new scenario homeowners are looking for more info on. What if you took out an equity loan on your primary residence or investment property when the market was hot, but now the mortgage is too high? If so, you’re not alone. We have many clients call with this problem and we’re now seeing how banks prefer to handle that type of situation. Take this home that we just received short sale approval on from Bank of America. The home is an investment property on Glenister Drive in Springfield, VA. The borrowers pulled equity out of the home and now the home is worth less than they owe the two banks involved: 1st trust is PNC Bank and 2nd is BofA. We were able to get a good contract on this home, which was enough to pay off the 1st trust, but left BofA without full payment. In this case, we were able to get BofA to agree to accept the proceeds left over from the sale of the home after PNC was paid, which turned out to be only 10% of the 2nd trust amount. This was great news, but because the homeowner could not show that they used the equity loan to improve the investment home (proof of improvements are typically shown during appraisal), BofA would not agree to accept the 10% as full payoff. They agreed to allow the sale of the home and they are sending the unpaid amount to their collections department and the sale will show up on the borrowers credit report as “Charged Off”. These are not the numbers, but I thought I’d give an example of how the money side of it worked out – and the approval letter for your review is below that:

Borrower Owes:
$250,000 1st Trust to PNC
$115,000 2nd Trust to BofA Equity Loan

Home Sells for:
$275,000 (which pays off the first trust, with $25,000 in proceeds for 2nd trust)

BofA takes the proceeds and sends the rest to collections due to no clear indication of equity loan reinvestment into home the equity was pulled from. In the example above, $90,000 will still be owed in some form to BofA. The good news is, the homeowner avoided foreclosure and the ongoing late payment hits to their credit score/history. Here is the approval letter from BofA: