Selling a House With an Outstanding Mortgage

Introduction to selling a house with an outstanding mortgage

Lots of homeowners are unsure about selling a house with an outstanding mortgage. Can it be done? Is it a complex undertaking? How does one approach it?

The reality is that selling a house with an outstanding mortgage is a feasible endeavor for most homeowners, and it’s more straightforward than perceived. In fact, it’s a common practice embraced by many sellers. Allow us to shed light on the process and guide you through it.

In this article (Skip to...)

• Can you sell a house with a mortgage?
• How to sell a home with a mortgage
• Mechanics of selling a home with a mortgage
• Selling a home for a profit
• FAQ

Can you sell a house with a mortgage?

Nearly all homeowners have zero problems selling their property even if they still owe money on their mortgage. In the last quarter of 2023, only 2.1% of them had potential issues, according to CoreLogic.

So, what’s the issue that could affect the 2.1%? Well, it’s something called negative equity.

Your home equity is calculated by subtracting your current mortgage balance from the market value of your home. For example, if your home is currently worth $300,000 and your mortgage loan balance is $160,000, you have positive equity of $140,000 ($300,000 value - $160,000 still owed = $140,000 equity).

Negative equity

As long as you’re among the 97.9% of American homeowners with positive equity in your home, your remaining loan balance is no obstacle to your selling a house with an outstanding mortgage.

It’s only if you’re among the 2.1% with negative equity (you owe more on your mortgage than your home is worth) that you may have a problem. But, even then, your mortgage lender may agree to a “short sale." That means the lender agrees to forgive or waive its claim to the difference between your home sale price and your mortgage balance. In some states, you need to get that waiver in writing before you sell.

Naturally, if you have enough saved to bridge your equity gap, you can pay off your mortgage using a combination of the sale proceeds and your savings.

How to sell a home with a mortgage

So, providing you have positive equity, selling a house with an outstanding mortgage is just selling a home. However, you’ll still want to understand the financial implications of your move.

Most people use some or all the equity that they have in their existing home as a down payment on their next one. Remember, the bigger your down payment, the lower your next mortgage rate is likely to be, all other things being equal.

So, you have some choices to make about that, the value of the home you can comfortably afford to buy, and how much (if any) you want to retain for other purposes.

Payoff statement

In order to run the numbers, you must first know them. It’s easy to find out your existing mortgage balance. Just bear in mind it’s your mortgage servicer (the company to which you make your monthly payments) you need. Your original mortgage lender very likely sold your mortgage to investors soon after you bought the home so it’s no longer in the picture.

Many mortgage servicers let you check your “payoff statement” online. That’s the size of the check you’d get if you paid off your mortgage in full today. If there’s no online facility, call the helpdesk number on your last statement.

Just don’t forget to deduct any closing costs (real estate agents’ fees, for example) and other expenses (pro rata taxes, homeowners insurance, and homeowners’ association fees, perhaps) for which you’ll be liable. Pro rata costs cover the days in the month when you close during which you still own the home.

Your payoff statement is just a snapshot of the day it was issued. You’ll keep paying down your mortgage and your home will keep changing value between then and closing date. So, expect your final proceeds to be a little different.

Your home’s market value

Market value is the other key component when you run the numbers. You need to get a feel for the listing price your home will command.

If money’s tight, it might be worth getting in an appraiser or real estate agent to advise you reasonably about the value. Otherwise, you should be able to get a reasonable feel for it by checking local listings and recent sales of comparable homes.

Of course, listings are just asking prices and homes may sell for more or less than that. But recent sales are often easily accessible as public records. Read What’s My House Worth? for more information about estimating your home’s value.

Simple arithmetic

When you know your payoff amount and your home’s market value, the arithmetic couldn’t be easier. Just deduct the first from the second. And make an allowance for the costs and fees we mentioned earlier.

You now know how much you have to play with and can set about allocating that across the down payment, closing costs on your next home, moving expenses, and money you wish to retain for other purposes.

Decide on the selling strategy that’s best for you

You have three main choices when deciding how to sell your home:

1. Traditional sale through a real estate agent — Most people choose this because they value an agent’s expertise and access to a deep pool of home buyers. And appointing an agent may become less costly following the $418M NAR settlement that some think could see their commissions tumble by 30%
2. For Sale by Owner (FSBO) — The do-it-yourself option. And you might save a bundle. But be prepared for a time-consuming operation with lots of research, paperwork, and interaction with prospective home buyers. Make sure you take the time to decide on a realistic asking price that optimizes your proceeds of sale. Read What does a real estate agent do to sell your home?
3. Selling to an investor or iBuyer — This is typically the fastest way to sell a home. Investors and iBuyers tend to trade on speedy transactions. But they often pay less than you could get from a mainstream buyer.

The mechanics of selling a house with an outstanding mortgage

When selling a house with an outstanding mortgage you must redeem your existing loan(s) on closing. Why loans? Because if you have a second mortgage (commonly a home equity loan or home equity line of credit (HELOC)) secured on the property, that must be redeemed, too. In this context, redeemed means paid off in full.

This isn’t something you can duck. The escrow company, attorney or other professional who handles your closing will deduct the money to redeem your mortgage(s) from the incoming transfer from your buyer or his or her lender. So, you won’t even see the money.

Deductions will also be made at this point for any closing costs, fees and pro rata charges for which you’re liable. So, the check (or nowadays more likely electronic transfer) you receive is your money, free and clear.

As a seller, your job at closing is to make sure that all the documentation is in order, including the paperwork that releases your lien. In this context, a lien is a lawyer’s fancy name for a mortgage, and your release must show that you have discharged your duties to your old lender(s).

What happens when you sell your home for a profit?

The Mortgage Reports is not an expert in taxation. So, it’s important that you reach out to a professional about tax implications when selling for a profit.

But the IRS’s website said in March 2024:

“If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic no. 409 covers general capital gain and loss information. You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.”

Read the IRS’s webpage from which that quote came to fully understand your potential liability. And that Publication 523 sounds worth a visit, too.

Selling a house with an outstanding mortgage: Conclusion

Unless you are unlucky enough to be among the 2.1% of homeowners with negative equity, you have nothing to fear from selling a house with an outstanding mortgage. Most sellers are in your position.

And the system is set up to make the whole sales process straightforward. Your old mortgage is automatically redeemed on closing and you can divert some or all the remaining proceeds as a down payment on your next home. Many manage to close on their sale and purchase on the same day, making things even more simple.

When working out how much you’re likely to make on your sale, you deduct the sum on your payoff statement from your home’s market value. That gives you the amount of equity you have, which is your financial interest in the home. If you have one or more second mortgages, you need to deduct their payoff statements, too.

Don’t forget to take closing costs, fees and pro rata liabilities into account when calculating how much you can afford for your next down payment. And, if you’ve made a particularly handsome profit from owning the home, you might owe something to the IRS.

FAQ