What happens to the second mortgage in a short sale?




What if I have a second mortgage or HELOC and I need to short sell my home?

Many of our short sellers have a second mortgage or HELOC (home equity line of credit). In a short sale all mortgages and liens need to be settled in order to complete the sale. Here's how it works:

The first lien holder always gets paid first, so if a sale is enough to satisfy the first, but not the second mortgage, the first will get paid in full, and a short sale will address any shortage to the second.


John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $230,000.  Wells Fargo gets paid in full, and John must go through the short sale process with Navy Federal as they will not get full payment.

Sometimes, proceeds from a sale can't pay either loan in full, and two separate short sale negotiations must happen simultaneously.


John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $175,000.  John must pursue a short sale with both lenders as neither will be paid in full.

Most of the time second mortgages are assuming the largest loss in the short sale.

While the first will end up with a good portion of their investment, the second mortgage will usually end up with pennies on the dollar. General guidelines have been established with the largest investors (FHA, VA, Fannie Mae, Freddie Mac) as to how much a junior lien holder will be allowed to paid out by the first in a short sale. 

Sometimes junior lien holders can get difficult!

Some loans are not backed by one of the major investors and those short sales do not fit into any established guidelines. It is in those instances that a second lien holder is likely to make your short sale more difficult, or ask for greater proceeds than originally anticipated. Holders of first and second mortgages don't always agree on what they will settle for.


John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $175,000. Wells Fargo says they will allow $3,000 to go Navy Federal, however Navy Federal won't settle for less than $5,000. As you can see this presents a shortage. This obstacle must be overcome in order to get to closing.

In an instance like this one, an experienced short sale negotiator will be able to work with your lien holders in order get them to agree to a mutually agreeable payoff amount or to minimize the shortage by as much as possible to make it easier for the parties to absorb. 

However, it is very possible that the shortage cannot be completely eliminated and the buyer or seller will have to come up with extra funds to satisfy the demands of the second in order to get to the closing.

When entering into a short sale with multiple lien holders, a situation like the one described above should be anticipated. Your best defense as a seller is to have an experienced, successful short sale agent working on your behalf.


We went through a short sale and Minna's team was amazing every step of the way. They made a very sad and stressful time seem easier by handling all the little details. They always stayed positive and put us in contact with an amazing legal team. We couldn't be more pleased.


Last Updated on March 4, 2024 by Minna Reid


May 12, 2022

Quick guide to understanding the FHA Pre-Foreclosure Sales Program

January 13, 2021

Is your mortgage forbearance ending? Know your options!

March 6, 2020

How can I save my home from foreclosure?

Leave a Reply

Your email address will not be published. Required fields are marked

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}