Can You Sell a House You’re Still Paying Off?
Understand the process and financial considerations of selling a house when you still have an active mortgage.
It is possible to sell a house even if a mortgage is still being paid off. This is common, with the outstanding loan typically settled during the sale. The process involves using sale proceeds to fully repay the mortgage, releasing the lender’s claim.
Understanding Your Current Financial Position
Before selling, determine the exact amount owed on your mortgage. Obtain a “payoff statement” from your mortgage servicer, as it details the precise amount needed to satisfy the loan on a specific date, including principal, accrued interest, and fees. Lenders typically provide this statement within seven business days.
The payoff amount differs from your current balance because interest accrues daily, and the statement includes interest up to an expiration date. Some mortgage agreements may include a prepayment penalty if the loan is paid off early, typically within the first few years. These penalties are often 1% to 2% of the remaining loan amount, limited by federal law to a maximum of 2% within the first two years, or 1% in the third year.
Understanding your home’s equity is important. Equity is the portion of your home you own outright, calculated by subtracting your outstanding mortgage balance from the home’s current market value. For example, a $450,000 home with a $100,000 mortgage has $350,000 in equity. Negative equity occurs when the outstanding mortgage balance exceeds the home’s current market value.
The Standard Sale Process
When selling a home with an existing mortgage, the process involves using sale proceeds to clear the outstanding loan. Homeowners continue making regular mortgage payments until the closing date to keep the loan current and avoid penalties.
Once an offer is accepted and the closing date is set, the seller’s mortgage is paid off directly from the sale proceeds. Days before closing, the lender provides an updated payoff statement, valid for 10 to 30 days, indicating the exact amount required on closing day.
The closing agent, such as a title company or attorney, facilitates this payoff. At closing, the buyer’s funds are disbursed, and the closing agent sends the payoff amount directly to the seller’s mortgage lender. This extinguishes the mortgage, and any remaining funds after the mortgage payoff and other selling costs are disbursed to the seller as net proceeds.
Selling When Your Home’s Value Is Less Than Your Mortgage
Selling a home with negative equity, also called being “underwater,” presents challenges because the sale price may not cover the outstanding mortgage balance. In this scenario, the seller typically needs to bring additional cash to closing to cover the deficit. This ensures the mortgage is paid off and the title transferred.
Another option is a “short sale,” where the lender agrees to allow the homeowner to sell the property for less than the outstanding mortgage balance. This requires direct negotiation with the lender, who must approve the sale and accept a loss. The homeowner submits a financial package to the lender to demonstrate hardship and gain approval.
During a short sale, all proceeds go directly to the lender. The lender decides whether to forgive the remaining balance or pursue a “deficiency judgment,” requiring the former homeowner to pay all or part of the difference. Short sales can be lengthy due to required lender approvals and negotiations.
Key Financial Aspects of Selling
Beyond the mortgage payoff, sellers incur various closing costs that reduce their net proceeds. Real estate commissions are typically the largest expense, averaging 5% to 6% of the sale price, often split between agents. Other seller-paid costs include transfer taxes, levied by governments on property ownership transfer, and title insurance premiums for the lender’s policy.
Sellers may also pay escrow fees, which cover the services of the escrow or closing agent. These fees vary based on sale price and location. Some homeowners might face capital gains tax on their home sale profit. However, IRS Section 121 provides a tax benefit for primary residences.
Under this exclusion, individuals can exclude up to $250,000 of capital gains from taxable income, and married couples filing jointly can exclude up to $500,000. To qualify, the homeowner must have owned and used the home as their primary residence for at least two of the five years preceding the sale. Net proceeds are calculated by taking the sale price and subtracting the mortgage payoff amount and all associated selling costs, including commissions and other closing fees.