Selling your home can be a challenging and exciting time. While you’re considering a new home for the next chapter of your life, you’ll need to simultaneously negotiate a home sale with a buyer. In order to ensure a smooth transition, it’s best to ensure your home is free of any financial claims on your home in the form of a lien – but that’s not always possible.
Luckily, selling a house with a lien on it is a frequent occurrence. Mortgages are a common type of lien, after all, and these liens can be paid off during a home sale. Can you sell a house with a second mortgage on it, however? It depends. If you've been wondering, "can a house be sold with a lien on it?" we'll break it down in simple terms.
Liens and second mortgages: an overview
Not all liens are created equal, and it helps to know the basic differences and how they can impact a home sale.
Liens generally fall into two camps: voluntary and involuntary. About two-thirds of owner-occupied homes currently have a voluntary lien on them in the form of a mortgage. If you’ve ever taken out a second mortgage such as a home equity loan or home equity line of credit (HELOC), then you’ve also encountered a voluntary lien. These are generally used to secure a debt that you took out on purpose, and they’re very common in real estate transactions.
Involuntary liens, much as the name implies, are placed on your home for other reasons that you didn’t explicitly consent to, such as if you didn’t pay a contractor for work on your home, didn’t pay your taxes or HOA dues, or if a judge has ruled against you in court after someone sued you.
Impact of liens on a home sale
Having a lien on your house doesn’t prevent you from selling it per se, but it can scare off buyers or make it impossible for them to obtain financing to purchase your home. Liens are attached to your house, even if you sell the home and transfer the title to someone else.
That means a creditor could foreclose on their new home if your old debt isn’t repaid; a prospect that, understandably, many buyers would like to avoid. Furthermore, most mortgage lenders won’t finance a home that already has a lien attached to it, closing off the doors to everyone except cash buyers who generally make up a small fraction of the market.
How liens are handled during the closing process
Selling a house with a lien on it is still very common due to procedural workarounds. Two-thirds of homes currently have a mortgage on them, after all. Generally, liens are paid off during escrow using the proceeds from the home sale. Chances are your mortgage balance is less than the negotiated sales price — especially if you have significant equity in the home — and your escrow agent will simply pay off your old mortgage and send any remaining funds to you. This removes the lien, and you’ll receive a smaller payout in return.
Your escrow agent can also pay off any additional debts at the same time to remove other liens during the closing process — if you have enough equity in your home. If a buyer offers you $500,000 and you have a mortgage for $400,000, then there’s no issue; you’ll receive $100,000 after the sale. Let’s say you also have a $200,000 judgment lien, however, in which case your home sale proceeds won’t be enough to clear the second debt. In that case, the deal may fall apart unless you’re able to find another way to clear the title for the buyer.
What to do before selling a house with a lien
Selling a house with a lien on it isn’t impossible, but it does take a bit of extra preparation and disclosure. First, you’ll want to get a rough idea of your home’s value so you know how much you may be able to sell it for. You can use real estate websites such as Redfin or Zillow to help with this in the absence of a recent appraisal.
Next, gather a current title report. You can pay a title company to do this, or perform a property title search with your local government recording department. This will give you a list of all liens filed on your home, so you don’t have any surprises. Make sure everything is accurate; if not, you may need to dispute it.
You’ll need to know how much money it’ll take to pay off these debts so you can clear your home’s title during the escrow process. Reach out to any creditors with legitimate liens filed against your home and request a payoff statement. Keep this document handy because you may need to provide it to the closing agent.
If you have the financial means available, you can consider paying off the debt ahead of time to ensure a clear title. You can also try to negotiate with your creditor to accept a payment plan or settle your debt for less than you owe, although be aware that debt settlement can damage your credit and potentially incur additional taxes.
This is known as a “short sale” when done for your primary mortgage — i.e. if your lender agrees to accept less than you owe on your mortgage in exchange for releasing you from the loan and removing the lien on your home. If you’re considering these options, it may be wise to consult with a real estate attorney and a tax advisor as well.
Special considerations for homeowners with HEIs
Home equity investments (HEIs) aren’t considered a second mortgage such as a home equity loan or HELOC. Even so, HEIs result in a lien being filed on your house just the same. In Point’s case, any liens you had aside from your primary mortgage would have been cleared up when you first took out your HEI, meaning that you’ll just have one or two liens. (It’s still worth double-checking a title report, however, in case other liens have been filed against your home in the interim).
When it comes time to sell your home, your HEI will work the same as any other lien filed on your home. During the closing process, your escrow agent will use the proceeds from the home sale to pay off any remaining mortgage balance first, followed by the amount due to Point. Any remaining funds after that are sent to you, and Point will release the lien on your home. A home sale is currently one of the most common ways to pay back an HEI.
Selling a house with a home equity loan or other lien on it can be intimidating and add another potential snag into the process. When handled correctly, however, a lien should not affect the sale of your home. Working with a knowledgeable real estate agent and being upfront in disclosing any liens to potential buyers can help you ensure a smoother transition for everyone involved.