Can You Sell a House If You Still Owe a Mortgage?

Selling a house with an existing mortgage is a common scenario in the real estate market. This process is manageable and represents a standard transaction for many homeowners. Understanding how your mortgage factors into the sale is important for a smooth transition.

Understanding the Mortgage Payoff Process

When selling a property with an outstanding mortgage, the first step is determining the exact amount required to satisfy the loan. This figure is provided in a “payoff statement” or “payoff letter” from your mortgage lender or servicer. The payoff statement details the remaining principal balance, accrued interest up to a specific date, and other potential fees. It also includes the per diem interest, which is the daily interest amount, to account for closing date variations.

The statement specifies an expiration date, after which the payoff amount may change due to additional accrued interest. This figure differs from the balance on your regular monthly mortgage statement, which does not account for daily interest accrual or final fees. The outstanding mortgage is paid directly from the sale proceeds at closing.

Selling with Equity

Selling a home with a mortgage most often involves positive equity. Equity is the difference between the home’s current market value or sale price and the total outstanding mortgage balance and any other liens. For instance, if your home sells for $400,000 and you owe $200,000, you have $200,000 in equity.

As you make mortgage payments, a portion reduces the principal balance, increasing your equity. If the market value of your home increases, your equity also grows. At closing, after the mortgage and all other selling expenses and closing costs are paid from the sale proceeds, the remaining funds are disbursed to you as the seller.

Selling with Negative Equity

A challenging situation arises when the sale price of your home is less than the total outstanding mortgage balance, a condition known as “negative equity” or being “underwater.” In this scenario, the proceeds from the sale are insufficient to cover the mortgage debt. The seller would typically need to bring additional funds to the closing table to cover this difference.

If bringing cash to closing is not feasible, an alternative solution might be a “short sale.” A short sale occurs when the mortgage lender agrees to allow the property to be sold for less than the amount owed on the mortgage. This process requires the lender’s approval, as they are agreeing to accept a loss.

The homeowner usually needs to demonstrate financial hardship to qualify for a short sale. While a short sale can help avoid foreclosure and may have a lesser impact on credit than a foreclosure, it is a complex process that involves significant lender involvement and can take an extended period to complete. All proceeds from a short sale go directly to the lender.

The Closing Process for a Mortgaged Property

The culmination of selling a mortgaged property is the closing, where the legal transfer of ownership and financial transactions occur. A neutral third party, often referred to as a closing agent, escrow officer, or title company representative, facilitates this process. This agent is responsible for ensuring all funds are properly received and disbursed according to the sales contract and legal requirements.

The closing agent receives the buyer’s funds and ensures that all liens on the property, including your outstanding mortgage, are paid off directly from the sale proceeds. This means the seller does not directly handle the mortgage payoff; instead, the closing agent manages the transfer of funds to the mortgage lender. Key documents signed at closing include the deed, which transfers legal ownership to the buyer, and other documents confirming the satisfaction of the mortgage and any other financial obligations related to the sale.