Can I Sell a House With a Mortgage?

Selling a home with an existing mortgage is a common occurrence in real estate transactions. It is a straightforward process when handled correctly. The fundamental principle involves settling the outstanding mortgage balance as an integral part of the property sale. This repayment typically happens during the final stages of the transaction, ensuring the lien on the property is removed and clear title can be transferred to the new owner.

How Mortgage Payoff Works During a Sale

When a property with an existing mortgage is sold, the mortgage represents a lien against the title. This lien signifies the lender’s security interest in the home until the loan is fully repaid. To transfer clear ownership to a new buyer, this lien must be satisfied and released.

The outstanding mortgage balance, along with any accrued interest and associated fees, is paid off using the proceeds from the home sale at closing. A designated closing agent, such as a title company or an attorney, plays a central role. This agent obtains a precise payoff statement from the mortgage lender, detailing the exact amount required to satisfy the loan, including principal, interest up to the closing date, and any potential fees.

At the closing table, the buyer’s funds are disbursed, and a portion is directly allocated to the seller’s mortgage lender to cover the payoff amount. Once the lender receives these funds, they release the lien on the property, confirming the loan has been paid in full. The seller’s net proceeds are then calculated by subtracting the mortgage payoff amount, closing costs, and other selling expenses from the final sale price.

Selling When You Owe More Than Your Home’s Value

A challenging situation arises when the outstanding mortgage balance on a home exceeds its current market value, commonly referred to as being “underwater” or “upside down.” In such cases, a traditional sale would not generate enough funds to pay off the mortgage entirely. This scenario often necessitates a “short sale,” where the mortgage lender agrees to accept a sale price less than the total amount owed on the loan.

Short sales are typically pursued by homeowners experiencing significant financial hardship, such as job loss, medical emergencies, divorce, or a substantial reduction in income, which makes it impossible to continue making mortgage payments. The process involves the homeowner negotiating with their lender to approve the sale at a reduced price. Lenders often consider short sales as a way to minimize their losses compared to the more costly and lengthy foreclosure process.

The homeowner must submit a financial package to the lender, providing documentation of their hardship and justifying the need for a short sale. While a short sale can help avoid foreclosure, it does have a negative impact on the seller’s credit score, though generally less severe than a foreclosure. The negative mark can remain on a credit report for up to seven years, but recovery of credit scores can often begin sooner than after a foreclosure.

Understanding Mortgage Assumption

Mortgage assumption is a less common transaction where a buyer takes over the seller’s existing mortgage, including its remaining balance, interest rate, and original terms. This can be appealing to buyers, especially when current interest rates are higher than the rate on the existing mortgage. However, most conventional mortgages include a “due-on-sale” clause, which grants the lender the right to demand full repayment of the loan if the property is sold or transferred without their consent.

The presence of a due-on-sale clause means that a buyer typically cannot simply assume a mortgage without the lender’s explicit approval. If a transfer occurs without consent, the lender can call the entire loan due, making the transaction impossible. While generally rare for conventional loans, government-backed mortgages, such as those insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), are typically assumable, provided the new buyer meets specific credit and financial qualifications set by the lender and the respective agency.

Even with assumable loans, the buyer must often pay the difference between the home’s purchase price and the assumed mortgage balance as a cash down payment or through a second loan. The seller remains liable for the mortgage if the buyer defaults, unless the lender provides a formal release of liability. Given the complexities and requirements, mortgage assumptions are not a widespread practice but can offer advantages in specific market conditions.

Steps in Selling a Mortgaged Home

Selling a home with a mortgage involves several sequential steps:
Evaluate Home Value and Payoff: Determine the home’s current market value and the precise mortgage payoff amount. Obtain an official payoff statement from the lender.
Engage a Real Estate Agent: Work with an agent for pricing, marketing, and listing the property.
Due Diligence and Financing: After an offer is accepted, the transaction proceeds through due diligence, including home inspection, appraisal, and buyer financing.
Closing: Ownership officially transfers and financial transactions are completed. The mortgage is paid off from the sale proceeds, and the closing agent handles fund disbursement.
Seller Responsibility: The seller remains responsible for mortgage payments until the closing date.