It sounds counterintuitive, but homeowners tend to sell their house before they’ve paid for it. Consider how 88% of recent buyers financed on average 87% of their home purchase. 30-year mortgages are popular, yet people only stay in their homes an average of 13.3 years. That’s less than half of the span of the loan term.
So, selling your house with one mortgage still on it is actually the norm.
Now if you have another mortgage in the mix—say, because you needed some extra cash to take on that kitchen remodel—then it can be a little confusing to grasp how that’ll factor into your home sale. Most of the items you’ve sold in life (hand bags, treadmills, that old La-Z-Boy you bought way back) don’t have all these extra IOUs attached.
That’s OK though. Everything else you’ve tagged at a garage sale or put on eBay in the past doesn’t gain value the same way your house does and you can’t borrow against their value. That’s why selling your house with one mortgage, two mortgages…should be no problem so long as you follow the right steps. Your home’s worth should (ideally) cover what’s owed!
Just be certain on one thing: both mortgages are due at the time of sale. If your sale price for any reason fails to satisfy both loans in full, then you’ll need to cover the gap with other funds or work with your lender on a plan.
Knowing that, let’s dig into the details for how to sell your house with a second mortgage based on the insights and advice of top experts in the business.
Take a minute to review your second mortgage
You already get a vivid reminder every month that you have a second mortgage. Your lender is not one to let you forget that you owe them money. Most likely, you make your primary mortgage payment like clockwork, and right on its coattails, your second mortgage payment gets deducted from your bank account.
It may have been awhile since you signed on the dotted line, though, so here’s a quick rehash of what it means to have a second mortgage.
A second mortgage allows you to borrow against your home’s equity. Home equity is the portion of your home you own. Your lender (whether it’s a bank, credit union, etc.) owns the portion of the home you haven’t paid off yet.
Nearly 44 million homeowners with mortgages have more than 20% equity in their home. It amounts to a combined $5.98 trillion, which means that on average, borrowers have $136,000 in equity that can be tapped.
When you tap into your home equity, you put your home up as collateral (which means your lender can repossess your house if you stop making payments).
In most cases, a second mortgage’s interest rate is lower than a credit card. That means if you only had two options to pay for, say, your wedding— through a credit card or second mortgage—you’d probably want to opt for the second mortgage’s lower interest rate.
The national average annual percentage rate (APR), or the yearly rate you pay for borrowing money, is at a record high 17.76%. In comparison, the average home equity loan rate is 6.93% and the average mortgage interest rate is currently 3.93% APR for 30-year fixed rate mortgages. (The most common loan term is a 30-year mortgage; a fixed rate means that the interest rate doesn’t change during a mortgage’s 30-year loan term.)
You can use the money from your second mortgage for almost anything—to go back to school, consolidate debt, renovate your basement, or even go on a trip around the world.
There are two main types of second mortgages: home equity loans and home equity lines of credit (HELOCs).
Home equity loans
A home equity loan is a type of second mortgage that taps into your home’s equity with a one-time lump sum. You pay the loan back in monthly installments with interest, just like your original mortgage. Most home equity loan terms range from 5 to 30 years, which means you pay off your home equity loan during that specific loan term.
Home equity line of credit (HELOC)
HELOCs are second mortgages, too, but your lender won’t give you money in a lump sum like it would with a home equity loan. Instead, your lender approves you for a line of credit and you withdraw what you need. Similar to a credit card, you have a credit limit that you can’t go over. Your lender may help you get special checks or a card to make it easier for you to access your loan.
Selling the house, second mortgage and all! 5 steps are all it takes
Now that you’re sure you want to sell your home, read through the next five simple steps so you’ll know exactly what to expect when you sell your home with a second mortgage. Then, put it all into action.
1. Run the numbers: Does your home’s sale price cover the remaining balance of both mortgages?
A good first step is to do some preliminary math. You’ll need to take into account the value of your home, what’s still owed on each mortgage, and how much money you’d have left after paying off both.
Most real estate agents use a seller’s net sheet to help calculate these results. (It’s one good reason to hire a top real estate agent who’s whipped up hundreds of these documents before, particularly if you have a more complex financial situation.)
Renee Kolar, a real estate agent with 33 years of real estate experience, provides every seller with a net sheet, which shows each seller what he or she owes on each mortgage as well as any property taxes, closing costs, and any commissions involved. Kolar says she tries to make sure that every client she works with has a net sheet that’s accurate to within $100 or so at closing.
Want to gauge the net proceeds on your own? Here’s how you do it:
Figure out how much your house is worth.
You can use HomeLight’s Home Value Estimator as a great starting point for gauging your home’s worth. It gathers data and property information from multiple sources to provide you with a real-time estimate.
But to confirm the results, especially if it appears like you cut it close on paying off both mortgages, go ahead and get a comparative market analysis (CMA) from a local agent or obtain a professional appraisal to lock down your home’s fair market value.
Deduct expenses and the outstanding debt of both mortgages.
Take the sales price of the home and subtract any and all liens on the property and total selling costs, which may include closing costs, excise and/or transfer taxes, real estate commissions, and any credits you may be giving to the buyer.
For example, if you sell your home for $500,000 and have two mortgages, the primary mortgage ($335,000) and a second mortgage ($25,000), you can quickly determine what the estimated net proceeds would be:
$500,000 (sale price)
$335,000 (first mortgage)
$25,000 (second mortgage)
$45,000 (9% selling costs)
$95,000 net proceeds
To find out how much you owe on both the primary or secondary mortgages, check your loan account for what’s called the “payoff amount.” You can’t assume that the “current balance” on your last payment includes interest. When in doubt, contact your loan service provider, who is required to provide you with the total amount you’ll need to pay to satisfy a loan.
2. Check into any prepayment penalties with your lender.
A prepayment penalty is a fee charged by some lenders if you pay off all or part of your mortgage early. Most mortgages today do not have a prepayment penalty, but they do exist. Typically, you’d pay a penalty for the loan if you paid off your entire loan during the first three to five years of your mortgage, according to the Consumer Financial Protection Bureau (CFPB).
Not sure whether you agreed to a prepayment penalty at the closing of your second mortgage? Check with your second mortgage lender to confirm whether a prepayment penalty exists and how much it is, then make a plan to take care of it during the sale of your home.
3. Go faster: Provide documentation of your second mortgage paperwork
Nobody likes dealing with documents, but the reality is that selling your home involves a lot of paperwork. You can speed up the process by giving your real estate agent or title company copies of your second mortgage paperwork.
As soon as a buyer agrees to purchase your home, the title company is next in line to do its job:
- Make sure that the title of your house is legitimate (as in, there are no outstanding liens or judgments on the property).
- Determine your payout estimate, which is how much you’ll need to pay back to satisfy both mortgages (including your second mortgage).
Kolar says she tries to get that information up front and divvies it out to the parties who need it for her clients.
“The day I meet the seller, I want a copy of their property survey, I want their statements on all their mortgages, I want any disclosures, any documentation, any inspections,” she says. “We’re going to need it at some point so we might as well get it up front and not waste time later.”
Here’s a list of other documentation besides the mortgage and financing documents, though some may not be applicable to your situation:
- Original sales contract for your house
- Property survey
- Certificate of occupancy
- Compliance certificates (building and zoning code information)
- Tax records
- The original appraisal
- Homeowners’ insurance information
- Inspection information
- Home repair and maintenance, warranty information for any appliances
- Homeowners’ association information
Look for a real estate agent who wants to speed up the process and who can take care of as much documentation as possible on your behalf.
4. Pay off both mortgages at the time of sale.
When the deal closes, your home’s sale price should theoretically pay off both mortgages, and you’ll then get paid in the amount of the remaining proceeds.
“It really should not make a difference how many mortgages you owe and what is owed, so long as you have the money to pay it off,” says Chris Baumann, the business development team leader at Socotra Capital and top loan originator in the San Francisco Bay area.
“If you’re waiting to sell the property before paying off the loan, then yes, you should have either the money to pay it off or the net proceeds once the deal closes.”
Kolar says the second mortgage just twists the closing process ever so slightly. “You’re going to have to have the payout from the second lien mortgage and that’s going to have to be included in the closing process. But really, it’s only a couple of documents in amongst the other documents you’re signing at closing,” she says.
The specific documentation will depend on which lender you’re working with and the type of second mortgage you took out.
5. Review your options if you can’t pay back the second mortgage debt.
Does your real estate agent’s net sheet make you feel like the floor’s dropping out from under your feet? Does the debit line of your net sheet look like you’re going to owe a lot more money than you planned? What should you do if you can’t pay back the second mortgage?
“The sales price must be able to pay off both mortgages in full, otherwise you will end up having to come to the settlement table with the difference or enter into a short sale agreement with one or both of the lien holders,” says Paul Swanson, residential mortgage financing expert.
Here’s what you’re looking at as far as options go:
- Find a way to cover the costs of the second mortgage through separate investments, a windfall, or other means.
- Do a short sale. During a short sale, second mortgage lien holders agree to be paid less than what they’re owed. You must be able to offer the lender proof that you aren’t able to pay off the rest of the mortgage to qualify for a short sale, however.
It’s not an ideal route because short sales will damage your credit. But Kolar says she worked with about 20 sellers to do short sales during the Great Recession and “it’s better to sell your house in a short sale than be foreclosed on.”
Speed to the finish selling your house with a second mortgage
By now, you know that your second mortgage should, under normal market conditions and stable financial circumstances, have no effect on your ability to sell your home.
However, Kolar says there’s one major way you can put yourself firmly in the driver’s seat, particularly if you do have a second mortgage.
“Find a good, experienced Realtor that’s dealt with second mortgages and is knowledgeable to get that done,” she says. “There’s all these little steps along the way that if you don’t have a good realtor following up and making sure these steps happen, you’re not going to get to closing on time.”
Set aside time with your real estate agent to carefully go over each milestone of the process so he or she can help you through the paperwork. That way, you’ll have all your papers in a row and your second (and first) mortgage all tidied up when prospective buyers begin getting in line to see your home.
Header Image Source: (Rob Christian Crosby/ Death to the Stock Photo)