Can You Sell a House You Still Owe Money On?

You can sell a house even with an outstanding mortgage. This is common, as many homeowners do not pay off their loan before selling. The existing mortgage balance is typically settled at the time of sale, with funds coming directly from the sale proceeds.

Determining Your Financial Position for Sale

Understanding your financial standing is crucial before listing a property. Obtain an official mortgage payoff statement from your lender. This provides the precise amount required to fully satisfy your loan, differing from your current balance. It includes daily interest and any fees up to a specific future date, usually valid for 10 to 30 days.

Once you have the payoff amount, you can estimate your home equity. This calculation involves subtracting your mortgage payoff amount and estimated selling costs from your estimated sale price. For example, if a home is valued at $450,000 and the mortgage payoff is $100,000, there is $350,000 in equity before accounting for selling costs.

Selling costs can reduce net proceeds. Common expenses include real estate commissions, typically ranging from 5% to 6% of the sale price, split between the buyer’s and seller’s agents. Other costs encompass title fees, which can be around 0.5% to 1% of the sale price, transfer taxes that vary by location, and potential attorney fees, usually between $750 and $2,000 for residential transactions.

The Closing Process and Mortgage Payoff

During the closing process, a third party, such as a title company or an escrow agent, plays a central role in facilitating the transaction. This entity ensures that all conditions of the sale are met and that the transfer of ownership occurs smoothly and legally.

The buyer’s funds are channeled through this escrow or title company. These funds are then disbursed to pay off the seller’s existing mortgage lender directly. This ensures the loan is satisfied, and the seller does not need to handle the direct payment.

Upon full payment of the mortgage, the lender is obligated to release their lien on the property. This ensures the buyer receives a clear title, meaning the property is free from any legal claims or financial obligations from the previous owner’s mortgage. After the mortgage is paid off and all other closing costs and fees are settled, any remaining funds are then disbursed to the seller as net proceeds from the sale.

Addressing Insufficient Sale Proceeds

Sometimes, the sale price of a home may not be enough to cover the outstanding mortgage balance and all associated selling costs. This scenario is known as having “negative equity” or being “underwater” on a mortgage, meaning the property’s value is less than the amount owed.

If the sale proceeds are insufficient to cover the total amount owed, the seller may need to bring personal funds to the closing. This cash contribution would cover the deficit, ensuring the mortgage is fully paid off and all closing costs are satisfied.

Another option is a “short sale.” A short sale occurs when a property is sold for less than the outstanding mortgage balance, and it requires the mortgage lender’s explicit approval. The lender agrees to accept less than the full amount owed to avoid the more costly and lengthy process of foreclosure. This process can be complex and may negatively impact the seller’s credit score, though typically less severely than a foreclosure.