Can You Sell Your House With a Mortgage?

It is possible to sell a home with an existing mortgage. When a property with an outstanding mortgage is sold, the existing loan is typically paid off as part of the sale transaction. This process ensures the property’s title is clear for the new owner.

Understanding Your Mortgage Details and Equity

Before listing a home for sale, it is beneficial to understand the current financial standing of the mortgage. This begins with obtaining an accurate mortgage payoff statement from the loan servicer. This document is different from a regular monthly statement, as it provides the precise amount required to fully satisfy the loan on a specific date, including the remaining principal balance, accrued interest, and any applicable fees or prepayment penalties.

Mortgage servicers can provide payoff statements through various channels, such as their online portals, by phone, or through mail. The statement will also detail the “per diem” interest, which is the daily interest accrual, and an expiration date for the quoted payoff amount, as the total owed changes daily.

Equally important is calculating the home’s equity, which represents the portion of the property’s value owned outright. Equity is determined by subtracting the total outstanding mortgage balance and any other liens from the home’s current market value. For example, if a home is valued at $400,000 and the outstanding mortgage is $250,000, the equity would be $150,000.

When planning a sale, it is also necessary to account for selling costs, such as real estate agent commissions and closing costs, which will reduce the net proceeds received from the sale.

The Process of Selling with an Existing Mortgage

The payoff of an existing mortgage occurs during the closing process of the home sale. A neutral third party, such as a title company or an escrow agent, plays a central role in facilitating this transaction. This entity is responsible for ensuring that all financial obligations related to the property are settled before ownership is transferred to the buyer.

At the closing table, the funds from the buyer are first used to cover this outstanding mortgage balance. The closing agent directly wires these funds to the mortgage lender, ensuring the loan is fully satisfied.

After the mortgage is paid, any remaining funds from the sale proceeds, after deducting other selling costs such as real estate commissions and closing fees, are disbursed to the seller as net proceeds. If the sale proceeds are insufficient to cover the mortgage and all selling costs, the seller may need to bring additional funds to closing.

Following the sale, it is important to confirm that the mortgage account is officially closed by the lender and that a lien release is recorded with the appropriate county or state office. This legal document formally removes the lender’s claim on the property, providing clear title to the new owner.

Specific Sale Situations

Selling a home with an existing mortgage can lead to different financial outcomes based on the homeowner’s equity position. When a seller has significant equity in their home, meaning the market value substantially exceeds the mortgage balance and selling costs, they will receive a considerable net profit. These funds can be used for a down payment on a new home, invested, or saved.

Conversely, if a seller has limited equity, the net proceeds after paying off the mortgage and other selling expenses may be minimal or even zero. In such cases, it is crucial to perform accurate calculations beforehand to avoid situations where the seller might need to pay out-of-pocket at closing to complete the transaction.

A more challenging situation arises when the home is “underwater,” meaning the outstanding mortgage balance is greater than the home’s current market value. Selling in this scenario typically involves a “short sale,” where the mortgage lender agrees to accept less than the full amount owed to release the lien.

A short sale requires the lender’s approval and involves a detailed negotiation process, as the homeowner must demonstrate financial hardship. While a short sale can prevent foreclosure, it can still have tax implications. Forgiven debt from a short sale on a primary residence may be exempt from taxes through 2025, but sellers should consult a tax professional for specific guidance.

For homeowners selling and buying another property concurrently, logistical coordination is often necessary. Strategies include making the purchase of a new home contingent upon the sale of the current one, or utilizing a bridge loan. A bridge loan is a short-term financing option that allows a homeowner to access equity from their current home to use as a down payment on a new home before the existing property is sold. These loans typically carry higher interest rates and are repaid once the original home sale is finalized.