What Happens When You Sell Your House But Still Owe Money?

Selling a home before paying off the mortgage is quite common. According to the Zillow Group Consumer Housing Trends Report 2018, the typical homeowner lives in their home for 13 years before selling. With most mortgages having a 15 or 30-year repayment period, many homeowners end up selling while still owing money on their home loan.

If you find yourself in this situation. you may be wondering – what happens when you sell your house but still have an outstanding mortgage balance? Here’s a detailed look at how it works

You’re Responsible for Repaying the Loan at Closing

When you sell a home prior to fully repaying the mortgage, the expectation is that you will use proceeds from the sale to settle the outstanding loan balance. This is why lenders allow these transactions to move forward in the first place.

And it’s an issue that’s easily resolved You settle the outstanding balance when you complete the sale; it’s often part of the round of exchanged funds that occurs during the closing This expectation that you’ll use the sale proceeds to repay the debt is the reason the lender is letting the sale go forward

Essentially, your mortgage lender gets paid first when you sell the home. Any profits left after repaying the loan are yours to keep.

The Mortgage Balance is Deducted at Closing

On the day of closing, the title company or attorney overseeing the transaction will handle paying off your mortgage as part of disbursing sale proceeds.

Here’s a simplified look at how it works

• Your home sells for $350,000
• You owe $200,000 on your mortgage
• Total closing costs are $20,000

The title company will deduct the $200,000 mortgage payoff and $20,000 in closing costs from the $350,000 sale price, leaving you with $130,000 in proceeds.

You won’t have to stress about making sure the mortgage lender gets paid. The title company handles everything behind the scenes and pays off the loan directly on your behalf.

Your Lender Can Require Direct Payment

While payoff through the title company is standard, loan documents may stipulate that the lender receives proceeds directly from the buyer. This scenario is less common, but possible.

If this is the case, loan repayment will be listed as a required contingency in the purchase contract. The buyer will be informed they must pay the agreed-upon sales price minus closing costs and commissions, then issue a second check directly to the lender for the mortgage payoff amount.

Short Sales are Handled Differently

If you owe more on the home than it’s worth (known as being “underwater”), repaying the mortgage in full at closing isn’t possible. In these cases, you’ll need lender approval for a short sale.

In a short sale, the lender agrees to accept less than the full loan payoff amount as satisfaction of the debt. This discount on repayment allows an underwater home to sell.

Short sale requirements vary by lender. The lender may ask you to repay a portion of the balance post-closing or even refuse the transaction if you can’t prove financial hardship.

Your Credit Can Take a Hit if the Loan Isn’t Repaid

It’s essential to repay your mortgage balance to avoid damaging your credit. If the sale proceeds don’t cover what you owe, you’re still on the hook for the remaining debt.

Failure to satisfy the loan obligation after selling can quickly hurt your credit score and make it difficult to qualify for future loans. Missed mortgage payments will be reported to credit bureaus and the lender may pursue collection efforts or legal action.

Some options if you end up with debt after selling include:

• Taking out a personal loan to cover the balance
• Entering into a payment plan with the lender
• Voluntarily surrendering the home to foreclosure (impacts credit severely)

Check Your Loan Terms Before Selling

Before listing your home, be sure to review your mortgage documents to understand any clauses that may impact the sale. Watch for:

Prepayment Penalties: Fees charged for paying off the loan early, often within the first 3-5 years. This affects your proceeds.

Assumption Clause: Allows buyer to take over your mortgage. Can make financing easier but may limit price.

Due on Sale Clause: Requires immediate repayment upon transfer of ownership. If excluded, buyer may be able to take over mortgage.

Consult Your Lender Early in the Process

Contact your lender as soon as you decide to sell. They can provide up-to-date mortgage payoff information and clarify specific loan requirements. This helps avoid surprises and ensures you know exactly how much is owed.

Ask the lender to calculate the payoff down to the estimated closing date. An early payoff quote may not reflect accrued interest and fees near closing time.

You’re Responsible for Payments Until Closing

Don’t forget – you’re obligated to make mortgage payments until the transaction completes and the lender is paid in full. Stopping payments prematurely can incur fees and negatively impact your credit.

Timing the final payment can get tricky. Work with your real estate agent and lender to ensure payments are made on time. The title company will adjust for any overlap at closing.

Proceeds Must Cover Closing Costs and Commissions

To fully repay your mortgage, sale proceeds need to cover real estate commissions, closing costs, and any other transaction fees on top of the loan payoff amount.

Closely review your estimated closing disclosure ahead of time so you understand your expected proceeds and net gain (or loss). Thoroughly vetting transaction costs ensures no surprises at closing time.

Consider Paying Down Your Loan Before Listing

If possible, make extra mortgage payments prior to listing your home. This lowers the payoff amount, increases your proceeds, and reduces the risk of coming up short at closing time.

Even a few extra monthly payments can make a difference. Carefully budgeting and saving up cash in the months leading up to your sale helps build in a nice buffer.

Speak with a Real Estate Agent About the Process

Experienced real estate agents frequently help clients sell properties that still have outstanding mortgage debt. Don’t hesitate to speak with an agent to walk through the process in your local market.

An agent can also request a customized net sheet from a title company to give you an early estimate of your closing costs and expected proceeds from any potential sale price. This helps you make an informed decision about listing your home.

Be Realistic When Setting a Sales Price

To maximize your profit, you’ll need to sell for enough to sufficiently cover closing costs and mortgage payoff in addition to your minimum sales price goal.

Work with your agent to set a realistic list price right from the start. Overpricing leads to stagnation on the market, while underpricing can shortchange your proceeds. Taking this into account when pricing gets you the optimal sale outcome.

Selling a home before you’ve paid off the mortgage can certainly be done – over a million homes are sold this way each year. Being informed about the process and having a clear picture of your finances helps ensure a smooth transaction with no negative surprises. Consult the right professionals and you can confidently navigate selling while still owing on your loan.