Can You Sell a House While Still Paying a Mortgage?

Selling a home while still carrying a mortgage is a common financial transaction. The proceeds from the sale are typically used to clear the outstanding mortgage balance, allowing for a smooth transfer of ownership. This article guides you through the necessary steps.

Determining Your Financial Position

Before listing your home, understand your financial standing. This involves obtaining precise figures for your mortgage and estimating your home’s market value.

Request an official mortgage payoff statement from your lender. This document provides the exact amount required to satisfy your loan on a specific date, including principal, accrued interest, and fees. It also specifies the per diem interest, which accrues daily, for accurate calculation up to the closing date. This official statement accounts for all necessary charges to close out the loan, unlike a simple balance inquiry.

Next, estimate your home’s market value to gauge its potential sale price. Consulting a local real estate agent for a comparative market analysis (CMA) provides insights based on recent sales of similar properties. You can also research comparable sales or use online valuation tools, though these offer less precise estimates than a professional assessment.

With your estimated market value and mortgage payoff, calculate your estimated equity or potential deficit. Equity is determined by subtracting your mortgage payoff and anticipated selling costs from the estimated sale price. If your mortgage payoff and selling costs exceed the estimated sale price, you face a potential deficit.

Understanding selling costs is important, as these expenses reduce your net proceeds. Common costs include real estate agent commissions, typically 5% to 6% of the sale price, split between agents. Other closing costs, 2% to 5% of the sale price, may cover title insurance, escrow fees, attorney fees, and local transfer taxes. Some mortgage agreements may also include a pre-payment penalty.

Executing the Sale and Mortgage Payoff

Once your financial position is clear, the next phase involves listing your home and managing the sale process through closing.

Prepare your home for the market, which may include minor repairs or staging, then list it with a real estate agent. The agent markets the property, arranges showings, and helps negotiate offers. Upon accepting an offer, a purchase agreement is executed, outlining the sale terms, price, and closing date.

The closing process officially pays off the existing mortgage. A title company or closing attorney, acting as a neutral third party, facilitates this. They obtain a final, updated payoff amount from your mortgage lender, accounting for all accrued interest up to the closing day. This ensures the precise amount needed to satisfy the loan is known and transferred.

At closing, sale proceeds are distributed according to a settlement statement. The title company or closing attorney first remits the exact payoff amount directly to your mortgage lender, satisfying the existing lien. Following payoff, the lender issues a lien release, removing their claim on the property’s title. This release is then recorded with the appropriate county office.

After the mortgage and all selling costs (commissions, closing costs, taxes) are deducted from the sale proceeds, any remaining funds are disbursed to you. If proceeds are insufficient to cover the mortgage payoff and all selling costs, you typically need to bring the difference to closing. This ensures the mortgage is fully satisfied and title transfers cleanly.

Addressing a Potential Sale Deficit

In some situations, the total amount owed on your mortgage, combined with selling costs, may exceed the property’s market value or sale price. This financial gap is known as a sale deficit.

When facing a sale deficit, a primary option is a “short sale.” This occurs when your mortgage lender agrees to accept less than the full amount owed on your mortgage as complete debt satisfaction. Lenders typically consider short sales to minimize losses compared to foreclosure.

The short sale process is complex, requiring direct negotiation with your lender. It usually involves submitting a hardship package detailing your financial situation. The lender reviews this and proposed sale terms, often requiring an appraisal. If approved, the lender provides a short sale approval letter outlining the terms for the reduced payoff. This process can be lengthy, potentially taking months, and often impacts your credit score.

If a sale deficit exists, other alternatives may be available. If manageable, you might bring cash to closing to cover the difference, ensuring the mortgage is fully paid and avoiding short sale complexities. Alternatively, if selling is not an immediate necessity, exploring loan modification options with your lender could adjust mortgage terms for more affordable payments.