Can I Sell My House With Mortgage Arrears?

It is often possible to sell a house even when facing mortgage arrears. This process involves navigating specific financial considerations and communicating effectively with the mortgage lender. Understanding the steps involved can help homeowners manage their situation and work towards a resolution.

Assessing Your Situation and Lender Communication

Before taking any action, homeowners should fully understand their total mortgage arrears. This includes the outstanding principal, accrued interest, late fees, penalties, or property inspection costs added by the lender due to delinquency. Gathering all mortgage statements, correspondence, and payment records is necessary to accurately determine the full extent of the debt.

Proactive communication with the mortgage lender is essential when considering selling a home with arrears. Homeowners should contact their lender to discuss their financial hardship and explore potential options. Inquire about the exact payoff amount, including all fees and charges, and confirm the specific steps the lender requires for a sale to proceed. Understanding the lender’s policies regarding a sale while in arrears helps prevent misunderstandings.

When engaging with the lender, homeowners should be prepared to provide details about their financial circumstances and the reasons for the arrears. They may be asked to submit documentation such as income verification, bank statements, and a hardship letter. Obtaining a clear understanding of the lender’s expectations and potential forbearance or repayment plans can also be beneficial, even if the ultimate goal is to sell. This direct engagement can streamline the process of obtaining necessary approvals.

Selling Strategies Based on Home Equity

The approach to selling a home with mortgage arrears depends on the property’s market value relative to the total amount owed. If the home’s current market value exceeds the outstanding mortgage balance, including all arrears, the homeowner has positive equity. In this scenario, a standard sale is pursued, where proceeds cover the entire mortgage debt, closing costs, and accumulated arrears, potentially leaving residual funds.

When a home holds positive equity, the process mirrors a conventional real estate transaction. The homeowner lists the property, accepts an offer, and proceeds to closing, where the mortgage loan is paid off in full from the sale proceeds. This straightforward approach allows for the complete resolution of the mortgage debt and arrears without requiring special lender approval beyond standard payoff procedures. The financial outcome is clean, with all obligations satisfied at closing.

Conversely, if the home’s market value is less than the total amount owed on the mortgage, including arrears and estimated selling costs, the homeowner is in negative equity. In this situation, a short sale becomes a strategy. A short sale occurs when the mortgage lender agrees to accept a sale price less than the full amount owed, taking a loss on the loan. This option is considered when a homeowner cannot cure the arrears and a standard sale would not cover the debt.

Initiating a short sale requires direct negotiation and approval from the mortgage lender. The homeowner must demonstrate financial hardship and provide documentation to support that a short sale is the only viable solution to avoid foreclosure. Lenders evaluate several factors, including the property’s appraised value, the homeowner’s financial situation, and potential foreclosure costs, before granting approval. The complexity of a short sale necessitates careful planning and communication with all parties.

Navigating the Sale Process

Once a homeowner has assessed their financial situation and determined a selling strategy, the next phase involves preparing the home for sale. This may include necessary repairs, decluttering, and general cleaning to enhance the property’s appeal. Engaging a qualified real estate agent experienced with sales involving financial complexities, such as mortgage arrears or short sales, can be beneficial. The agent can provide guidance on pricing, marketing, and navigating offers.

Listing the property involves marketing it through various channels to attract interested buyers. The real estate agent will handle photography, online listings, and showings. When offers are received, the homeowner, in consultation with their agent, will evaluate them based on price, terms, and the buyer’s ability to secure financing. For a standard sale with positive equity, this process is like any other home sale, with the primary goal of securing an offer that covers the outstanding mortgage and selling expenses.

In a short sale, the process includes an additional layer of lender involvement after an offer is accepted. Once a buyer’s offer is received and agreed upon by the homeowner, it must be submitted to the mortgage lender for approval. The lender will review the proposed sale price, the buyer’s financial qualifications, and conduct their own property valuation to ensure the offer is reasonable. This lender approval phase can extend the sale timeline significantly, potentially taking weeks or months.

Negotiations during a short sale may involve the lender requesting adjustments to the offer price or terms, or requiring additional documentation from the homeowner. The real estate agent plays an important role in facilitating communication between the buyer, seller, and lender during this period. Throughout the sale process, maintaining clear communication with all parties and responding promptly to requests helps keep the transaction moving towards closing.

Closing the Sale and Resolving Arrears

The culmination of the selling process is the closing, where the property title is transferred to the buyer and financial transactions are finalized. At closing, sale proceeds are disbursed to cover various costs, with the mortgage loan being the primary recipient. The closing agent, often an attorney or title company representative, calculates all amounts owed, including the mortgage’s principal balance, accumulated interest, and full mortgage arrears. These funds are then wired directly to the mortgage lender, ensuring the loan is paid off.

In a standard sale with positive equity, the funds from the buyer are sufficient to satisfy the entire mortgage debt, including all arrears and associated fees, as well as the seller’s closing costs like real estate commissions, transfer taxes, and title insurance premiums. Once the mortgage is paid in full, the property lien is released, and the homeowner’s obligation to the lender is completely satisfied. Any remaining proceeds, after all expenses and the mortgage payoff, are then disbursed to the seller.

For a short sale, the closing process is similar in structure, but with a key distinction regarding debt resolution. While sale proceeds are applied to the mortgage, they are insufficient to cover the entire outstanding balance. The difference between the sale price and the total amount owed is known as a deficiency balance. The lender, having agreed to the short sale, may choose to waive this deficiency, pursue the homeowner for repayment, or issue a Form 1099-C, Cancellation of Debt.

Understanding the lender’s policy on deficiency balances is important in a short sale scenario. Homeowners should seek clarification from their lender about whether the deficiency will be waived and, if so, obtain this agreement in writing. If the deficiency is not waived, the homeowner may still be responsible for the remaining debt. Additionally, if a Form 1099-C is issued, the canceled debt could be considered taxable income by the Internal Revenue Service, unless an exclusion or exception applies, such as insolvency or qualified principal residence indebtedness.

Citations:

The IRS provides guidance on canceled debt and Form 1099-C, including exceptions for qualified principal residence indebtedness.