How to Sell a House When You Have a Mortgage

Selling a home with an existing mortgage is common. This guide outlines the financial and procedural steps to successfully sell your property.

Understanding Your Current Mortgage Situation

Before listing your home, assess your current mortgage obligations. To obtain the exact amount needed to satisfy your loan, request a mortgage payoff statement from your loan servicer.

This document, also called a payoff letter, provides the total amount required, valid for a specific “good-through” date.

The payoff statement includes the remaining principal, accrued interest, and other potential fees. Interest accumulates daily, so the total payoff amount varies until the loan is satisfied. This statement is distinct from a regular monthly mortgage statement, which only shows your loan balance and next payment due. You can typically request this statement online, by phone, or in writing, and servicers are generally required to provide it within seven business days.

Check if your mortgage includes a prepayment penalty, though these are uncommon with standard fixed-rate mortgages originated after January 2014 due to federal regulations. If present, a prepayment penalty specifies a fee for paying off the mortgage balance early, usually within the first few years. Federal law limits these penalties to a maximum of 2% of the outstanding balance in the first two years and 1% in the third year, with no penalties allowed after three years from loan origination.

Calculate your home equity by subtracting your outstanding mortgage balance and any other liens from your home’s current market value. For example, if your home is valued at $400,000 and your mortgage balance is $250,000, you have $150,000 in equity. While a professional appraisal provides the most accurate valuation, an estimated market value can be obtained through comparative market analyses by a real estate agent or online tools for an initial assessment.

The Sales Process and Mortgage Payoff

Once you list your home and accept an offer, the mortgage is typically paid off using the sale proceeds at closing. The buyer’s funds are transferred to a neutral third party, known as the closing agent, which could be a title company, escrow company, or an attorney, depending on local practice.

The closing agent obtains the final mortgage payoff amount directly from your lender, ensuring correct fund disbursement. The payoff amount includes all principal, accrued interest, and applicable fees up to the closing date.

The closing agent also manages the payment of various other selling costs, such as real estate commissions, transfer taxes, and other fees associated with the sale. After all selling expenses and the outstanding mortgage are paid, any remaining net proceeds from the sale are then disbursed to you as the seller. This process ensures that the mortgage lien, which is a legal claim your lender has on your property, is properly satisfied and released. The closing agent typically handles the recording of the lien release with the appropriate county office, officially removing the encumbrance from the property’s title. Ensuring the lien is released is important for the new owner to receive clear title to the property.

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

In situations where your home’s current market value is less than the outstanding balance of your mortgage, selling the property becomes more challenging and typically involves a process called a “short sale.” A short sale occurs when the proceeds from the sale are “short” of the total amount owed on the mortgage, requiring the lender to agree to accept less than the full debt. This situation often arises when a homeowner faces financial distress, such as job loss or significant medical expenses, making it difficult to continue mortgage payments, especially if property values have declined.

A short sale requires direct approval and negotiation with your mortgage lender, as they must agree to take a loss on the loan. The process begins with the homeowner demonstrating a legitimate financial hardship that prevents them from fulfilling their mortgage obligations. This is typically done by submitting a “hardship letter” along with a comprehensive financial package to the lender. The hardship letter should be a concise, factual explanation of the circumstances that led to the financial difficulty, such as a job loss or medical emergency, and why it is beyond your control.

The financial package accompanying the hardship letter usually includes recent pay stubs, bank statements, tax returns, and potentially a comparative market analysis or appraisal to support the proposed sale price. The lender will evaluate this documentation to determine if approving a short sale is a more favorable outcome than pursuing foreclosure. The short sale process can be lengthy, often taking several weeks to months for lender approval, as they review offers and your financial situation.

While a short sale can help avoid foreclosure and its more severe impact on credit, it is a complex process. If a short sale is not feasible or approved, other alternatives may exist, such as bringing cash to closing to cover the deficiency if financially possible. Other options, like a deed in lieu of foreclosure, where you voluntarily transfer the property title to the lender, or even foreclosure itself, are generally considered as last resorts when all other avenues have been exhausted.