Can I Sell My Home With a Second Mortgage on It?

There shouldn't be many issues with selling your home if it has more than one mortgage on it. Though, home sellers need to be aware of the process and the minor potential issues that might arise. Home sellers shouldn't be overly concerned due to the presence of a second mortgage won't stop nor hinder most home sales. If the value of the home is declining, sometimes it can cause home sellers some distress as their equity deteriorates. However, educated homeowners will make more successful sales.

Legally there is little difference between first and second mortgages though some second mortgages may be designed differently than regular first mortgages. From a legal standpoint, any mortgage that is recorded after another loan is considered a second mortgage. Though, some lenders frame a second mortgage as either a shorter-term, higher interest rate, full disbursement mortgage, or a home equity lines-of-credit (HELOCs).

Function

When selling a house, regardless of how the homeowner uses the funds, a second mortgage will reduce the seller's cash received at the closing of the sale but it likely won't disrupt or prevent the sale. When the attorney, escrow agent, or title company draws up the closing documents, they simply factor in the second mortgage payoff amount into the final distribution of funds to the home seller.

Effects

A second mortgage shouldn't have much of an effect on a homeowner trying to sell her home. Though the seller of the property has to turn over their home free of encumbrances to the prospective buyer which includes any outstanding loan balances. The closing agent has to cumulate the first and second mortgage payoff amounts and ensure the property is lien-free. While the effects on buyers are nonexistent, sellers need to pay off the second mortgage along with the first mortgage.

Considerations

Homeowners should consider two possible issues when selling a home with a second mortgage. First, you should thoroughly review your second mortgage loan terms to see if there is a prepayment penalty associated with your note. Similar to first mortgage loans, some second mortgages also have prepayment penalties as well. They may require extra fees if the loan is paid off during the first couple of years (usually up to 5 years) of its existence. If you have an active home equity line of credit and you are cool with your lender, you may want to talk about another similar loan with a new home. Also, make sure your property's value is enough to pay off both the first and second mortgages. During events like recessions, the loss of real estate values can pose an obstacle for sellers.

Significance

A majority of the time, having a second mortgage won't cause any issues when you sell your house. However, whatever you need to pay off on the second mortgage could be significant if you need to replace the loan after you purchase a new home and if interest rates went up since you received your current second mortgage. If you need another second mortgage and your financial situation (credit score or employment) has declined, you might not be able to qualify for a new loan. This won't hinder your sale but it may give you a little heartburn in this case.