Can You Sell a House While Still Paying Mortgage?

It is possible to sell a house while still carrying a mortgage balance. Most homeowners sell their properties before completely paying off their loans. The existing mortgage is typically paid off as part of the home sale process, ensuring the title is clear for the new owner.

Understanding Your Current Mortgage

A mortgage is a secured loan, with the property serving as collateral. When selling your home, the existing mortgage lien must be released by paying off the loan at the time of sale. This ensures the buyer receives clear title, free of prior encumbrances.

To determine the exact payoff amount, request an official “payoff statement” from your lender. This statement provides the precise outstanding balance, including accrued interest and any fees, calculated for a specific closing date.

While prepayment penalties are less common today, review your mortgage agreement or consult your lender to confirm if any apply. Until the sale closes and the mortgage is paid off, you remain responsible for all scheduled payments to avoid late fees or negative credit impacts.

Assessing Your Home’s Value and Equity

Before listing your home, understand its market value. A real estate agent can provide a comparative market analysis (CMA) by evaluating recent sales of similar properties. For a formal valuation, consider a professional appraisal.

Calculate your home equity by subtracting your outstanding mortgage and any other liens (like a home equity loan) from the estimated market value. Positive equity means the home’s value exceeds what you owe, providing funds for the mortgage payoff and selling expenses.

Selling a home involves costs that reduce your net proceeds. These include real estate commissions, typically 5% to 6% of the sale price, often split between agents. Seller closing costs, an additional 1% to 4% of the sale price, cover items like transfer taxes, title insurance, and escrow fees.

The Home Selling Process

After assessing your financial position, prepare your home for the market. This includes decluttering, cleaning, and making minor repairs or cosmetic updates to enhance its appeal. Consider professional staging to highlight the property’s best features.

Select a qualified real estate agent to guide you from pricing to negotiating offers. The agent will list your property on the Multiple Listing Service (MLS), exposing it to a wide network of buyers and their agents, and coordinate showings.

Once offers come in, your agent will help you evaluate them, considering the purchase price and other terms like contingencies. Common contingencies include buyer financing, a satisfactory home inspection, and a successful appraisal.

Negotiating these terms is an important phase, aiming for an agreement that meets your objectives. The timeline from listing to an accepted offer varies by market conditions.

Once an offer is accepted, the process moves towards closing, involving due diligence activities like the buyer’s appraisal and inspection, which must be completed before the sale finalizes.

Mortgage Payoff at Closing

At closing, the existing mortgage is paid off directly from the sale proceeds. This step is typically handled by a neutral third party, such as a title company or escrow agent, who coordinates all financial transactions.

A few days before closing, your lender provides a final payoff statement, detailing the exact amount required to clear the loan, including interest accrued up to the closing day. The title company or escrow agent uses this figure to disburse funds.

The Closing Disclosure (CD), or a HUD-1 Settlement Statement, itemizes all credits and debits for both buyer and seller. This statement shows the mortgage payoff, real estate commissions, other closing costs, and net proceeds due to the seller.

Once the mortgage is paid, the lender releases the lien, and the seller receives any remaining funds.

Selling When Your Home’s Value is Less Than Your Mortgage

In situations where your home’s market value is less than the outstanding mortgage balance, you are considered to have “negative equity” or be “underwater.” Selling under these circumstances typically requires 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. For a short sale to proceed, you must typically demonstrate a financial hardship that prevents you from making your mortgage payments.

The process involves extensive negotiation with your lender, who must approve the sale price and terms. Lenders may agree to a short sale to avoid the more costly and time-consuming process of foreclosure.

A short sale is a complex transaction, often taking months to complete due to lender approval. While it helps avoid foreclosure, it negatively impacts your credit score, though generally less severely.

In some cases, the lender may forgive the remaining debt after the short sale; in others, you might still be liable for the difference, depending on state laws and lender agreements.