Can I Short Sell a Home with a Second Mortgage or HELOC?

Yes, you can short sell a home with two mortgages or a HELOC. This is where short sales get more complex, and where experience matters most.

What is a junior lien?

If you have a first mortgage plus a second mortgage, HELOC or home equity loan, that second loan is a junior lien. In a sale, the first lender is paid first. The second lender is paid only if money is left over, and in a short sale there usually isn't.

It doesn't disappear on its own

Many homeowners assume that if the first lender approves the short sale, the second loan goes away. It doesn't. To close, the title has to be clear, and every lienholder has to agree to release its lien.

How the negotiation usually works

1. A buyer makes an offer.
2. The first lender reviews the numbers and sets aside a limited amount for junior liens.
3. The second lender is offered a reduced payoff, often a few thousand dollars.
4. The second lender accepts, counters or pushes back.

This is one of the most delicate parts of a short sale.

When the second lender asks for too much

It's common to hear, "We won't release for less than $10,000." But in a foreclosure, a second lender often gets nothing, so most eventually accept a realistic amount. We use the foreclosure timeline and the first lender's limits to reach a workable settlement.

HELOCs

HELOCs are the most common problem because balances can be large and the lenders are often aggressive at first. They're also frequently settled for a fraction of the balance.

Will I still owe the second loan?

Releasing the lien isn't always the same as forgiving the debt. Some second lenders waive the balance and some don't. California's protections can differ for second loans, especially home equity loans and HELOCs. Make sure the approval says clearly what happens to the remaining balance, and have an attorney review it.

The bottom line

Having two loans doesn't disqualify you from a short sale. It means more negotiation and more coordination. Handled correctly, these short sales close every day.