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The complications between selling a house and an outstanding mortgage

The rose-colored story in real estate is to get a mortgage, pay it off in full, and own the home first before selling. Reality is rarely that squeaky clean.



Curveballs in life throw our stable life off balance, and suddenly the dream home with a mortgage attached is no longer the endgame. Is it possible to sell a home with an outstanding mortgage? The situation is more commonplace than absurd, but selling a home with an outstanding mortgage has complications.

The ideal process

A traditional selling process for mortgaged property acts like a traditional home sale. Acquire a real estate agent, decide on an asking price, list it online, wait for buyers to research and bid, select a winning bid, and close the property. The agent teams up with the title representatives and lawyers to ensure closing goes smoothly. Unlike a traditional home sale, the goal is to pay the remaining mortgage balance in full through the sale so the new owner starts on a clean slate. After the lender’s debt is complete, any remaining funds go to the seller as profit.

Complications in the ideal process

The appraiser may decide the home is worth less than the amount owed on the mortgage, and the fluctuating housing market may be to blame. However, resolve this with a short sale. If the lender agrees to take a reduction to pay off the debt in full, the seller and lender will team up to sell the home. However, both parties must agree to the winning bid.

A second complication is not attracting high bids to fulfill the mortgage contract. The lender will not approve of a low bid for fear of delinquency. There are a few options.

  • A bridge loan or second mortgage could change their mind. A bridge loan temporarily fills the gap between the first and second mortgage, paying off the balance. Conversely, the second mortgage (if allowed) will include the first mortgage’s outstanding balance plus the balance on the new home.

  • Agree to a promissory note. The lender will accept a lower offer and allow the home to exchange hands in closing. Then, the lender will use the promissory note to retrieve the outstanding payment in full or monthly installments until fulfilled.

  • Drastic solutions are foreclosure and bankruptcy. Consider both final resorts due to the severe and irreversible financial ramifications.

If an appraiser decides that a home is worth less than the amount owed on the mortgage, blame the fluctuating housing market. (Photo by DepositPhotos)

Are there additional complications?

It’s a positive thing to pay off mortgages early, but some lenders charge a prepayment fee for paying the loan off early. The agent expects commission for their part in the home sale regardless of whether the sale generated profits. Closing costs, home inspection fees, title fees, legal fees, and supplemental costs related to closing require payment. Capital gains or capital loss taxes are payment requirements too, yet the amount depends on the primary residence, the timeframe living in said residence, and profits/loss on the sale.

How to make the process seamless

  • Search for any home selling requirements in the contract and decide if the obligations meet or exceed expectations. Additionally, find out about any fees or penalties related to selling a home during an active mortgage. When in doubt, contact the lender for an explanation.

  • Learn the mortgage balance. It won’t be a permanent number due to increasing interest rates monthly, but it will offer insight on how to price the home.

  • Hire an appraisal to determine the current market value. Mention any interior and exterior remodeling projects to raise the value.

  • Gather the appraisal and outstanding balance and subtract the larger amount from the smaller amount to determine home equity.

Buyers finding out about a mortgage attached to the home should not get discouraged. The mortgage will not affect the buyer; the seller is the responsible party. He or she is responsible for fulfilling their end of the contract. Only then will the buyer enjoy the home free of obligations while the seller can freely move to the next home without debt.

(Featured image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Tonya Jones Reynolds is a freelance writer specializing in real estate, marketing, and money articles for Born2Invest. Some past and present companies she writes for include Blogmutt, YouQueen, Blasting News, Reflect & Refresh, Inman News,, and Textbroker. With 7+ years of experience as a freelance writer, she joined Born2Invest as a contributor to help readers make good decisions about their financial and professional lives.