Can You Sell Your House If You Still Owe on It?

It is possible to sell a house even with an outstanding mortgage. This is common for many homeowners. The process involves coordinating various parties to ensure the mortgage is satisfied at the time of sale. Understanding this transaction and the necessary preparatory steps can help homeowners navigate the selling process effectively.

How Your Mortgage is Paid Off When You Sell

When a home with an existing mortgage is sold, the outstanding loan is paid off directly from the sale proceeds at closing. A neutral third party, often an escrow or title company, manages this process as the closing agent. Their role ensures all financial obligations tied to the property are resolved before ownership transfers to the buyer.

The closing agent obtains a mortgage payoff statement from the seller’s lender. This document details the exact amount required to satisfy the loan on a specific date, known as the “good through” or expiration date. The payoff amount includes the remaining principal balance, accrued interest, and other associated fees. The total amount owed changes daily due to interest accrual, making the specific payoff date crucial for accurate calculation.

At closing, the buyer’s funds are directed to the escrow or title company. From these proceeds, the closing agent remits the precise payoff amount to the seller’s mortgage lender. This ensures the mortgage is paid off, and the lender issues a “satisfaction of mortgage” or “lien release” document. This document confirms the loan is repaid and removes the lender’s claim, clearing the title for the new owner. After the mortgage is satisfied and all other selling costs are covered, any remaining funds are disbursed to the seller.

Selling When You Owe More Than Your Home’s Value

When the amount owed on a mortgage, plus selling expenses, exceeds the home’s market value, it’s known as negative equity or being “underwater.” A traditional sale would require the homeowner to bring cash to closing to cover the shortfall. An alternative for financially distressed homeowners is a “short sale,” where the property sells for less than the outstanding mortgage balance.

A short sale requires direct negotiation and approval from the mortgage lender. The homeowner must demonstrate a financial hardship, such as job loss, medical emergency, or divorce, preventing mortgage payments. This is presented to the lender through a hardship letter, accompanied by financial documentation like bank statements, tax returns, or proof of income.

The lender evaluates the hardship and proposed sale price to determine if accepting a loss is more favorable than foreclosure. If approved, the lender accepts the sale proceeds, even if “short” of the full amount owed. A short sale significantly impacts a homeowner’s credit score, causing a drop of 100 to 150 points, and the negative mark can remain for up to seven years. While damaging, it is less severe than a foreclosure, which leads to a larger score drop and longer waiting periods for financing.

Lenders may forgive the remaining balance (deficiency) after a short sale, or they may pursue a deficiency judgment. A deficiency judgment requires the former homeowner to pay all or part of the difference. Its potential depends on state laws and terms negotiated with the lender. Homeowners considering a short sale should consult a real estate attorney to understand credit implications and any remaining financial obligations.

Preparing to Sell Your Home With an Existing Mortgage

Preparing to sell a home with an existing mortgage involves several financial and informational steps. Obtaining an official mortgage payoff statement from your current lender or loan servicer is an initial step. This statement can be requested online, by phone, or through mail, and usually arrives within one to seven business days.

Estimating total selling costs, which range from 6% to 10% of the home’s sale price, is another preparatory step. Real estate agent commissions are often the largest component, averaging between 4% and 6% of the sale price, split between the buyer’s and seller’s agents.

Other significant costs include title insurance (often paid by sellers, around 0.5% of sale price), escrow or settlement fees ($200 to 0.5% of purchase price), and transfer taxes, which vary by locality and payer.

Determining the home’s current market value is essential for setting an appropriate listing price and understanding potential proceeds. Homeowners can obtain a comparative market analysis (CMA) from a real estate agent, evaluating recent sales of similar properties. Online valuation tools also provide preliminary estimates. These valuations help calculate potential net proceeds by subtracting the estimated mortgage payoff and all selling costs from the estimated sale price.

Consulting qualified professionals early in the process is advisable. A real estate agent provides market insights, assists with pricing, and guides the selling process. A financial advisor or tax professional offers guidance on the sale’s financial implications, including potential tax liabilities on capital gains, ensuring informed decisions before listing.