It is common to sell a home with a mortgage. In fact, most homeowners have a mortgage outstanding when they sell. Once sold, the buyer’s purchase proceeds will pay off the remaining mortgage at closing, leaving them with the remaining equity, net of fees and expenses.
Whether you’re selling a house in Charlotte or a condo in Columbus, this Redfin Real Estate article explains exactly how selling a home with a mortgage works, what happens to the loan during closing, and the steps you should take to avoid any surprises.
Can I sell my house with the mortgage still outstanding?
The short answer is yes. Many homeowners sell their homes before paying off their mortgages.
If you sell, the buyer’s total purchase funds, including the down payment and new mortgage, will be used to pay off the remaining loan balance at closing. After the mortgage is paid and other expenses are covered, the money left over is your net income.
Mechanism of selling a house using a mortgage loan (overview)
In most cases, selling your home with a mortgage follows a simple process:
To find out how much you owe, request a mortgage payment statement from your lender. You list and sell your home just like any other real estate property. At closing, the buyer’s funds will be used to pay off the mortgage and you will receive the remaining proceeds.
What happens to the mortgage if I sell my house?
When the sale of your home is completed, the mortgage loan is automatically paid off as part of the transaction. The general process is:
The buyer sends funds to the title company or closing attorney. The closing agent will request the final repayment amount from your lender. Your mortgage balance is paid directly to your lender. The lender waives its lien on the property. The remaining amount, excluding fees and charges, will be transferred to the seller as revenue.
Because the mortgage is paid off at closing, the seller usually does not need to make any special arrangements to settle the loan in advance.
How to sell a house with a mortgage: step by step
Step 1: Obtain your mortgage repayment statement
Before you call your real estate agent, call your financial institution. Ask for a mortgage repayment statement. You will know the exact amount on the closing date. This figure includes the loan balance, unpaid interest, and sometimes prepayment fees and administrative fees. This payoff amount serves as the baseline for all other calculations.
The payoff amount may be slightly higher than your current loan balance because it includes unpaid interest up to the scheduled payoff date.
Step 2: Estimate your net revenue
Once you’ve reaped the rewards, the next step is to consider what’s left. Subtract the following from the estimated sales price:
What’s left is the net profit, the money you can take home if all goes well. If the numbers are lower than you expected, or if you’re in the red, you’ll need to decide whether to hold off on the sale, lend for now, or pursue a short sale, where the lender agrees to accept less than what you owe.
For example, if you sell your home for $500,000 and still owe $320,000 on your mortgage, your total equity is $180,000. After agent fees, closing costs, and other expenses, your final return could be close to $140,000.
Some homeowners may consider loan assumptions or modifications, depending on the loan type and lender flexibility. A quick conversation with your lender will clarify your options.
Also, see if your lender holds funds in escrow for taxes and insurance. If so, ask if the remaining escrow balance will be refunded to you after the mortgage is paid off.
Step 3: Choose a sales method
There are two routes. Hire a listing agent or sell it yourself (FSBO – For Sale By Owner).
When you hire an agent, you get someone who can help you with market analysis, pricing strategies, professional photos, negotiation support, and handle all the paperwork. You’ll pay a fee, but you’ll also buy peace of mind.
Selling on your own means you do everything yourself, and the buyer’s agent may still expect a cut. FSBO works when the market is active or you already have a buyer, but be honest about whether you have the ability to handle the contracts, disclosures, and everything in between.
Step 4: Accurate pricing
Pricing is especially important when you are capital-thin, meaning there is not a large cushion between your mortgage and market value.
If you price your home too high, it may be abandoned, putting pressure on your schedule and costs. If you set your prices too low, you could end up in debt when you close. In any case, speculation is risky.
Have your agent perform a comparative market analysis (CMA) for you, or do one yourself using recent sales of comparable homes in your area. Although the selling price will be higher, do your best to ensure that you clear your debts and expenses. If it’s too close for comfort, talk to your lender about your options if you fall short. They may allow short-term repayments or consider difficult measures.
Step 5: Carefully list, present, and vet your offer
Once the home is priced and listed, viewings begin. We clean, have flexible schedules, and respond quickly to buyer questions. When offers come in, don’t just focus on price. Also consider:
Whether the buyer will pay cash or need financing How secure they are with a loan pre-approval Whether they are seeking assistance with closing costs Schedule and contingencies (inspections, appraisals, etc.) Whether they need to sell their home first
If pricing is tight, pay close attention to valuation contingencies. A low valuation may delay financing or require renegotiation. If you receive an offer with a valuation gap clause (where the buyer agrees to make up the shortfall), it may be a safer option than a higher offer without a valuation gap clause.
Step 6: Post-sale summary
Once the house sells:
Cancel automatic mortgage payments Cancel homeowners insurance (after reviewing contract records) Notify utilities and update address Keep closing documents in a safe place Check with lender for refund of escrow funds, if applicable
In many cases, homeowners who have lived in their home for at least two of the past five years may not have to pay capital gains taxes on the proceeds from the sale, up to $250,000 for individuals and $500,000 for married couples filing jointly. However, every situation is different, so it’s best to consult a tax professional to understand how the rules apply.
Common mistakes when selling a home with a mortgage
Selling a home with a mortgage is common, but some sellers run into avoidable problems. Common mistakes include:
Not asking for a payoff statement early in the process Overestimating how much equity you have in the home Forgetting to factor in closing costs and fees Ignoring potential prepayment penalties in your loan agreement
Planning ahead and estimating your proceeds early can help you avoid surprises at closing.
Can I sell my home if I owe more than it’s worth?
If you owe more than your home is worth, you have negative equity, also known as “underwater.” This can happen for a variety of reasons, including if you take out a second mortgage to pay off your debt, the housing market cools after buying at a peak price, or a sudden change in interest rates.
Negative equity is less common when the housing market is strong, but can occur if home values have declined or if the homeowner recently purchased with a small down payment.
Here’s what you can do:
Get short sale approval
A short sale is a special sale where you sell your home for less than what you owe. However, this type of sale requires lender approval and proof that you are facing actual financial hardship. Although short sales can negatively impact your credit score, they are generally considered less damaging than foreclosures.
Bring cash before closing
Some homeowners choose to bring cash to closing to cover the difference between the home’s sale price and the loan balance. Through this method, your credit score will not be affected as the full amount is paid to the lender.
rent your house
You’re not selling it, but if your mortgage agreement allows it, you may be able to ease the burden of mortgage arrears by renting out your home. You can use your rent to pay your mortgage until your home’s value recovers. Becoming a landlord can come with additional responsibilities, but you may be able to wait until market conditions improve.
Ask about a deed in lieu of foreclosure
Most lenders will want you to try selling your home first, but if you want to cut your losses and get your mortgage forgiven, a deed in lieu of foreclosure may be a good option. A deed in lieu of foreclosure is when you voluntarily give your home back to the bank in exchange for your mortgage being forgiven and your credit taking a hit, but it’s much better than being foreclosed on. Depending on the lender, moving funds may also be included.
Conclusion: Sell your house with a mortgage
Taking out a mortgage and selling your home means understanding what you owe, how much you’ll pay back, and who’s involved in making it all happen. For most homeowners, the process works just like a regular home sale. The mortgage is simply paid off using the buyer’s funds at closing.
By requesting payment statements early and estimating your net profit in advance, you can sell your home with confidence and avoid surprises at closing.
Frequently asked questions when selling a home with a mortgage
Can I sell my house if I still have a mortgage?
Yes, you can. Most homeowners sell before paying off their mortgage. The key is to obtain your mortgage payment statement so you know exactly how much you owe at closing.
Do I need to pay off my mortgage before selling my home?
No, the mortgage loan is typically automatically paid off using the buyer’s purchase funds during the closing process.
What happens to my mortgage if I sell my house?
At closing, the proceeds from the sale of the home will be applied first to paying off the remaining mortgage loan. The funds left over after covering costs and fees are your net income.
Is there a penalty if I take out a mortgage and sell my house?
As long as you are in good standing with your lender and your mortgage contract has a prepayment penalty, there is no penalty for taking out a mortgage and selling your home. Prepayment penalties only apply if you sell your home within the first few years of your mortgage.
Can I make money by taking out a mortgage and selling my house?
It depends on your equity, the difference between the sale price of your home and the amount you owe. After deducting the mortgage balance, fees, and closing costs, what’s left is yours.
Can I sell my home if I owe more than it’s worth?
Yes, but you should consider options such as a short sale, where the lender agrees to accept less than the full loan amount. This typically requires lender approval and can affect your credit.
Do I need to tell my lender that I’m selling my home?
yes. You should contact your lender early to request a mortgage payment statement and discuss any early repayment fees, escrow refunds, or other loan-specific details.
