Yes in some cases, though it is harder than selling a first-lien note. A loan that sits ahead of yours leaves fewer buyers willing to bid and lowers the price. The simplest structure is to pay off the underlying loan at closing from the sale proceeds, when the price is high enough to do it.
What “underlying loan” means here
You sold a property and carried the financing, but a loan you took out earlier is still attached to that property. Your payer pays you. You, or a servicing company, pay the earlier lender, and that earlier loan is the underlying loan.
The arrangement is known as a wraparound mortgage. Something similar happens with a land contract, another of the note types we see, where you keep the deed and your old loan stays in place while the buyer pays you over time.
The number to work out first
Buyers of wraparound mortgage notes look at total debt against the property’s value. Add the underlying loan balance to the price the buyer would pay for your note, then compare the total with what the property is worth. The result is called investment to value, and the lower it is, the safer the buyer’s position.
As an example, take a property worth $250,000 with $60,000 left on the underlying loan. If a buyer paid $90,000 for your note, $150,000 would stand against the property, which is 60% of its value. Raise the underlying balance to $140,000 and the same price puts $230,000 against it, 92% of the value, leaving the buyer almost no cushion.
Why buyers are cautious
With a first-lien note, a buyer whose payer stops paying can take the property and is paid before anyone else. An underlying loan changes that. The earlier lender has first claim, so your note is paid from what is left. A second payment now has to be made every month, and if it is missed for any reason, that lender can foreclose and wipe out the position behind it.
The lender may also be entitled to call the loan. A due-on-sale clause lets a lender demand full repayment when the property changes hands, and whoever buys your note takes on that risk. Whether the clause applies to you depends on your loan documents and your state, so have an attorney look at it before you sign anything.
How the sale can be structured
| Structure | How it works | What it means for you |
|---|---|---|
| Pay off the underlying loan at closing | The buyer funds the purchase. The closing agent pays your lender first and sends you the rest. | Your net check is the price minus the payoff. The buyer ends up in first position, which supports a better price. |
| Sell the note with the loan left in place | The buyer takes your position behind the lender and makes sure the underlying payment keeps being made. | Fewer buyers will do this. Those who do will price in the added risk. |
| Sell part of your payments | A buyer purchases a set number of payments, with the underlying payment still covered from each one. | Possible on some notes. The amount you keep each month after paying your lender has to be large enough to make it work. |
The first structure works only if the price is comfortably more than the payoff on your loan. When the two are close, little is left for you after closing, and it can be better to keep collecting the monthly difference and sell later, once the underlying loan has been paid down.
What to gather
- Your note and the security document recorded with it.
- The latest statement on the underlying loan, showing balance, rate and payment.
- Proof that the underlying loan is current.
- Your payer’s payment record, ideally from bank or servicer statements.
- Any servicing agreement that controls who pays the lender.
Mention the underlying loan in your first conversation with any broker or buyer. It will show up in the title search regardless, and an offer made without it will be cut once it surfaces.
Check the payoff against the price
Ask your lender for a written payoff figure, which can differ from the balance on your statement. Then send us the details of both loans and subtract that payoff from any offer to see what you would take home. If that figure is small, weigh it against the monthly difference you already collect, which keeps coming for as long as both loans are paid.
Related questions
Will the buyer of my note take over my underlying loan?
No. The loan stays in your name unless it is paid off. A buyer who leaves it in place will arrange for the payment to keep being made, for example through a servicer, but the lender still looks to you.
Do I have to tell the note buyer about the underlying loan?
Yes, and at the start. It will appear in the title search in any case. An offer made without that information will be reduced or withdrawn once it surfaces.
Can I sell if my underlying loan is behind?
It is much harder. A buyer will want the loan brought current, which can be done from the sale proceeds at closing only if the price covers it. Speak to an attorney promptly if your lender has started any action.