During the Great Recession, many homeowners found themselves with a bad, worse, and even worse option: get foreclosed on for non-payment, attempt to sell via a short sale or remain in their home through a mortgage modification. For those that went the option of the mortgage modification, a nasty surprise may await them when they attempt to sell their home: a Partial Claim.
A Partial Claim is the sum total of the missed payments, interest and modified equity, bundled into a silent second mortgage, due in full 30 years from the date of the mortgage modification. What makes a “silent second mortgage” is that there are no payments due until either the maturity date has been reached or the property is sold. This was apart of the mortgage modification process that the owner signed for and may not have realized what they were signing for. Also, since there aren’t any payments due now, they would not receive a statement showing the balance and many may have forgotten all about it. That is, until the homeowner attempts to sell their home.
The thing is, with these Partial Claim mortgages, they need to be paid in full and that could equal tens of thousands of dollars. On my most recent sale that included a Partial Claim, the amount owed (~$90,000) was one-third the price of the home. As a result, the only way to sell the property was as a short sale. This is zombie debt, back to steal equity that has been earned and paid over the last few years.
A short sale allows a homeowner, facing a hardship, to sell their property for less than what they owe on it. In this case, the property was sold at fair market value and it was a lot more than the first mortgage balance. However, once the Partial Claim was factored in, the sale resulted in a loss of nearly $50,000 after fees, taxes, and closing costs were factored in.
If you’re thinking of selling your home and had previously modified your mortgage, you will want to conduct a title search to see if there are any additional silent mortgages. The same holds true for home buyers that received down payment assistance with an ownership time requirement.