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Seller with a second mortgage is someone who is selling a home while holding a second mortgage on his or her property. A second mortgage is a loan where the borrower's home value serves as a collateral. While a primary mortgage is used to buy the property itself, second mortgage is meant to pay for other home-related expenses such as home improvements and mortgage insurance. Selling a property with a second mortgage isn't that much different than selling a property without one, but there are several things the seller must do to make sure the sale goes smoothly.
1) Factor in Second Mortgage Debt When Preparing Seller's Net Sheet
Seller's net sheet is a report that details how much money a seller will spend in order to sell his or her house. This includes the amount the seller has to pay to take care of the mortgage obligations. Many sellers make the mistake of only factoring in how much they owe on the primary mortgage. What they don't realize is that they will also have to pay off the second mortgage and fail to set aside enough money to cover those payments. This is why the sellers must take the amount they owe on the second mortgage into account when the seller's net sheet is compiled.
2) Compare the Home's Property Value to Second Mortgage Obligations
Ideally, the sales price would be able to cover most, if not all, of the expenses on the seller's net sheet and still leave enough money for the seller to earn profit. However, this may be difficult to achieve if the home's property value depreciated - dropped in comparison to how much the seller originally paid for it. If the value depreciated too much, the seller faces the danger of not having enough money to pay his or her mortgage obligations. Having the second mortgage would only compound the problem. The seller can anticipate this by getting a property assessment before the property is put up for sale.
3) Give the Title Company Documentation on the Second Mortgage
When the buyer and the seller agree on the closing price, a title and escrow company steps in. It's job is to check the seller's records and see if there are any unpaid debts related to the property. It will also be responsible for handling the financial transactions between the buyer and the seller. In order to do that, they will need to contact the seller's mortgage lender and determine how much the seller owns on their mortgage. They will also need to obtain the payout estimate - the estimate of how much the seller will have to pay to take care of his or her mortgage payment obligations. The seller can speed up the process by giving the title agency copies of his or her second mortgage paperwork.
4) Use Proceeds from the Sale to Pay Off the Second Mortgage
Once the title company verified that there are no unpaid debts related to the house, it will give the buyer a "free and clear" title, allowing the sale to proceed. The buyer will give the funds necessary to purchase the house to the title company, which, in turn, will transfer those funds to the seller.
However, the process will hit the snag if the seller's second mortgage has a due on sale clause. As the name implies, this clause states that all of the outstanding second mortgage debt must be repaid once the sale is complete and not a second later. This means that, until the second mortgage is repaid, the sale cannot be complete. In order to avoid this, the seller instruct the title company to use the sales proceeds to pay off the second mortgage debt.
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