What Happens to the Equity Loan When You Do a Warranty Deed?

Warranty Deed Overview

A warranty deed does more than simply transfer ownership of property from the seller to the buyer. It also warrants that the buyer is receiving title to the property free and clear of any liens and other encumbrances — limits on the buyer's rights of ownership — except for those that the seller has disclosed. In issuing this warranty, the seller pledges to defend the title against any encumbrances discovered later. Rarely is this necessary. Most buyers purchase title insurance, which provides the only absolute guaranty of clear title.

Equity Loan Overview

A home equity loan is a second mortgage on your property. It and the first mortgage are actually liens. The home equity loan promissory note is your contract with the lender that explains your rights and responsibilities under the terms of the loan. Among those responsibilities is immediate loan repayment should you sell the property. Your first mortgage promissory note contains a similar clause, and goes a step further to state that it takes first priority over all other loans. The home equity loan, then, is a subordinate lien that gets paid after the first mortgage.

Title Search

As your real estate transaction moves toward closing, the buyer's title company investigates the property's chain of ownership to determine who has claims on it. In so doing, it gathers information about the mortgage loans, since the mortgage lenders have claims in the form of mortgage liens. The title company works with the mortgage lenders to determine the exact balances on the first mortgage and home equity loans so that the seller can repay them.

Closing

The title officer or attorney who manages the closing is in charge off disbursing all of the money that changes hands at the closing table. The seller's real estate broker has, by this time, sent the buyer's deposit money to the title company. The buyer brings a certified check for the remainder of the purchase price, less the portion he's financing. His lender wires the amount of the loan. The closing statement, called a HUD-1 statement, shows these sale proceeds as credits to the seller. The statement deducts from the credits the amounts due the seller's first mortgage and home equity lenders. Once ownership of the property has been transferred to the buyer with the warranty deed, the first mortgage and home equity loans are repaid from the seller’s sale proceeds and the seller receives the rest, less closing costs.