Will a Second Mortgage Prevent You From Selling Your Home?
If you’re thinking about selling your home but have a second mortgage or home equity line of credit (HELOC) still attached to the property, you may be wondering: Will this stop the sale? The short answer is no—but it will affect the process.
A second mortgage, sometimes referred to as a subordinate lien, doesn’t necessarily block a sale, but it must be addressed before or at closing. For many homeowners, particularly those coming out of financial hardship or considering bankruptcy, understanding how these liens work and how they are paid off is critical to navigating the sale successfully—and avoiding unexpected legal or financial problems.
At Wadhwani & Shanfeld, our Los Angeles second mortgage lawyers regularly work with clients who are trying to sell homes with second mortgages, old HELOCs, or other lingering liens on title. Whether you’re in the early stages of planning a sale or facing pressure from creditors, here’s what you need to know.
What Is a Second Mortgage or Subordinate Lien?
A second mortgage is a loan that uses your home as collateral, just like your primary mortgage—but it’s in a lower priority position. This could be a fixed loan taken as a lump sum, or it could be a HELOC, which functions more like a credit card with a revolving balance.
These loans are called subordinate liens because they’re legally “behind” the first mortgage. If you sell or the home is foreclosed, the first mortgage must be paid in full before the second mortgage receives anything.
Other types of subordinate liens might include judgment liens, tax liens, or mechanic’s liens—but for this article, we’ll focus mainly on voluntary second mortgages and HELOCs.
Can You Sell a House With a Second Mortgage?
Yes, you can sell a home with a second mortgage—but you cannot ignore it. The lien must be paid off or negotiated before the home can be legally transferred to a new owner. When you go to sell your house, the title company will perform a search and find any outstanding liens. If there’s a second mortgage or HELOC, they will flag it, and it will appear on the closing documents.
This means that either:
- The proceeds from the sale must be enough to pay off both your first and second mortgage, or
- You must negotiate with the second mortgage lender to accept less than what’s owed, or release the lien in exchange for a partial payment or settlement.
What If You Don’t Have Enough Equity?
In a strong real estate market, most homeowners can sell and pay off both loans in full. But what if your home’s value has dropped—or you owe more than the home is worth once both mortgages are included?
This situation is known as being “underwater” or “upside down.” In this case, you’ll likely need to negotiate a payoff with the second mortgage lender.
Depending on the circumstances, the second mortgage lender may agree to:
- Accept a short payoff: This means they’ll take less than the full amount owed in exchange for releasing the lien.
- Release the lien but not the debt: Sometimes, the lender will agree to let the sale go through and remove the lien from the property, but they may still pursue you personally for the remaining balance afterward. This is an important detail to understand before agreeing to any terms.
- Forgive the balance entirely: In rare cases—especially if the lender believes they wouldn’t recover anything through foreclosure or litigation—they may agree to forgive the debt.
Negotiations can take time and should be handled carefully. Having an experienced attorney on your side can be critical, particularly if you are also considering bankruptcy or are already in a Chapter 13 repayment plan.
How Chapter 13 Bankruptcy Can Affect a Second Mortgage
If you are struggling with debt and trying to save your home, Chapter 13 bankruptcy offers a powerful tool that may help you eliminate a second mortgage entirely.
If your home is worth less than what you owe on the first mortgage alone, the second mortgage or HELOC can sometimes be “stripped”—meaning it is treated as an unsecured debt and removed from your property. This is only available through Chapter 13 and not Chapter 7, and it can result in a complete discharge of the second mortgage debt after you complete your repayment plan.
If your home is in a better equity position and lien stripping isn’t available, Chapter 13 can still give you time to catch up on payments, stop foreclosure, and negotiate a more manageable exit strategy—including a sale.
Protecting Yourself at Closing
It’s essential to review all lien balances and get payoff statements from your lenders before closing. This allows you to know exactly how much is owed and whether your sale proceeds will be sufficient. Your escrow or title company will typically handle the disbursement of funds to pay off liens at closing, but you need to ensure all lienholders are accounted for and that any negotiated payoffs are properly documented.
Don’t assume an old HELOC that hasn’t been used in years is no longer a threat. Many of these loans remain active on title—even if the account balance is low—and will need to be resolved before you can transfer ownership of your home.
Contact Wadhwani & Shanfeld
If you’re planning to sell your home but have a second mortgage or HELOC, don’t let uncertainty delay your plans. At Wadhwani & Shanfeld, we’ve helped thousands of Californians navigate complex financial and legal issues surrounding home sales, second mortgages, and bankruptcy. Whether you need help negotiating with lenders, stripping a lien through Chapter 13, or understanding your full range of options, our experienced attorneys are here to guide you. Contact us today for a free consultation—and let us help you move forward with confidence.
Source:
homelight.com/blog/how-to-sell-a-house-with-a-second-mortgage
