What Happens If You Sell a House With a Mortgage?

Selling a home with an existing mortgage is common. A mortgage does not prevent a sale; it integrates into the transaction. Understanding your mortgage and other financial considerations helps navigate real estate transactions. This article clarifies the financial and procedural aspects of selling a property with an outstanding mortgage, from preparation to closing.

Understanding Your Mortgage and Equity

Before listing a home for sale, understand your mortgage and equity. The mortgage payoff amount is the exact figure needed to satisfy your home loan, differing from your current principal balance. This amount includes the remaining principal, accrued interest up to a specific date, and any unpaid fees or late charges, plus daily “per diem” interest.

Obtain an accurate payoff statement from your loan servicer via their online portal, phone, or written request. Specify the exact anticipated payoff date, as the amount is date-sensitive. This ensures all outstanding obligations are covered at closing.

Home equity is the portion of your property you own outright. It is calculated 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 you owe $140,000, your equity is $260,000.

Equity increases as you make principal payments and as the property’s market value appreciates. Positive equity provides proceeds after the mortgage is paid off, which can be used for a down payment on a new home or other financial goals.

Common Selling Costs

Selling a home involves various costs beyond the mortgage payoff, typically deducted from sale proceeds at closing. A significant expense is real estate agent commissions, often paid by the seller. The national average commission rate is about 5.44% of the sale price, ranging from 4.92% to 6.03% and negotiable. This percentage usually splits between the listing and buyer’s agents.

Other common seller closing costs include title insurance, escrow fees, and transfer taxes. The seller may pay for an owner’s title insurance policy, protecting the buyer, and sometimes a lender’s policy. Escrow fees, charged by the neutral third party, typically range from 1% to 2% of the home’s sale price, varying by location. For example, a $400,000 home might incur $4,000 to $8,000 in escrow fees.

Transfer taxes, also known as deed or stamp taxes, are imposed by state or local governments on property transfer; who pays depends on local custom or negotiation. Sellers may also incur attorney fees, especially where required for real estate transactions. Additional costs include recording fees, prorated property taxes, or homeowner association (HOA) fees for the seller’s ownership period.

Sellers might also agree to repair credits or concessions to the buyer, which reduce net proceeds. All these expenses are itemized and deducted at closing.

The Closing Process and Mortgage Payoff

The closing process finalizes the home sale, transferring ownership and financial transactions. A neutral third party, often a title company or attorney, acts as the closing agent. This agent ensures documents are prepared, signed, recorded, and manages funds.

The closing agent’s responsibility is to ensure the existing mortgage is paid off. The mortgage payoff amount, obtained by the seller, is sent directly from the sale proceeds to the lender. This releases the mortgage lien, giving the buyer a clear title free of the seller’s previous debt.

From the sale price, the closing agent first deducts the mortgage payoff. Following this, all other seller costs, such as real estate commissions, closing costs, and agreed-upon concessions, are deducted. The seller then receives the net proceeds from the sale.

If deductions exceed the sale price, the seller must bring funds to closing. The closing meeting involves signing legal documents, including the deed, which transfers ownership, and the final Closing Disclosure, detailing all financial aspects.

Selling When You Owe More Than the Home’s Value

When the amount owed on a mortgage, plus selling costs, exceeds the home’s market value, it creates a difficult situation. This is known as “negative equity” or being “underwater.” It occurs when property values decline, leaving the homeowner owing more than the home is worth. Selling becomes difficult as the sale price alone won’t cover the mortgage and expenses.

When facing negative equity, two main outcomes are possible if a sale proceeds. First, the seller must bring cash to closing to cover the deficit between the sale price, mortgage payoff, and all selling costs. This cash ensures the lender is fully paid and the title transfers free of old debt.

The second outcome is a “short sale,” where the mortgage lender agrees to accept less than the total outstanding loan balance. For a short sale, the homeowner typically needs to demonstrate financial hardship, and the lender must approve the sale. While preventing foreclosure, a short sale can negatively impact credit scores, potentially dropping them by 85 to 160 points, and may remain on a credit report for up to seven years.