You’re ready to sell your home, but there’s one big question on your mind: What happens to your mortgage when you do? It’s a critical part of the process that many homeowners overlook at first, but understanding it early can save you time, stress, and money down the road.
Selling a home isn’t as simple as handing over the keys. If you still owe money on your mortgage, there are important steps that happen behind the scenes, steps that can affect your timeline, your finances, and what you walk away with after the sale. In this guide, we’ll break down exactly what happens to your mortgage when you sell, so you can avoid unexpected surprises, protect your bottom line, and move forward with confidence.
Yes, you don’t need to fully pay your mortgage in order to sell your house; in fact, selling a property with a mortgage is something common. According to the Federal Reserve, about two-thirds of adults who owned their homes had a mortgage in 2024. That means most home sales in the U.S. involve an outstanding loan. But when you sell your property, the mortgage doesn’t just disappear; you must pay off the remaining loan balance at the time of closing.
This is because your mortgage is secured by the property, and your lender holds a legal claim (a lien) on it. Once the home changes ownership, that lien must be satisfied.
Paying off your mortgage is a key part of the selling process, but it doesn’t happen automatically. Here’s a clear, step-by-step breakdown of how your mortgage is handled from the moment you accept an offer to the final closing day so you can move forward with confidence and clarity.
Once a buyer makes an offer on your home, you and your real estate agent can negotiate the terms. If the buyer is a cash home buyer and you're not working with an agent, you’ll negotiate directly with the buyer. After reaching an agreement and signing a purchase contract, the house becomes “under contract.”
At this point, notify your mortgage lender that you’re planning to sell, and begin gathering any required documents.
Mortgage Payoff StatementAfter accepting an offer and entering into a contract with the buyer, your next step is to request a mortgage payoff statement from your lender. This document provides the exact amount you need to repay in order to satisfy your loan in full. It includes your remaining principal balance, any accrued interest up to the payoff date, and possible fees such as prepayment penalties or administrative charges.
It’s crucial to request this statement early, as it ensures the closing process goes smoothly and accurately. The title or escrow company handling your transaction will use the payoff amount to make sure your mortgage is fully paid off at closing. Once the loan is paid and the lien is released, the title can transfer cleanly to the new buyer.
Closing is the final step in the home-selling process, where ownership officially transfers from you to the buyer, and your mortgage is paid off in full. On the scheduled closing day, the buyer’s funds are wired to the escrow or title company. These funds are then used to pay off your existing mortgage according to the payoff statement you previously obtained.
In addition to your mortgage, the title company will deduct any other costs associated with the sale, such as real estate agent commissions, unpaid property taxes, or second mortgage balances, if applicable. After all obligations are settled, the remaining amount will be disbursed to you via wire transfer or cashier’s check.
Once your lender receives the mortgage payoff, they will issue a mortgage release or satisfaction of mortgage, legally removing their lien from the property. At this point, the buyer takes legal ownership, and your mortgage responsibility ends. If you made a mortgage payment shortly before closing that covered days beyond the payoff date, your lender will typically refund the overpaid interest or escrow balance.
Let’s say you sell your home for $350,000 and your mortgage payoff is $240,000.
If you pay:
Then your net proceeds would be:
$350,000 - $240,000 - $21,000 - $4,000 = $85,000
This $85,000 is your profit, which you can use as a down payment on your next home or for other financial goals.
In some cases, you may find that you owe more on your mortgage than what your home is currently worth. This situation is known as being “underwater” or “upside-down” on your mortgage. It can happen due to falling home values, taking out a large loan with little down payment, or not owning the home long enough to build equity.
Here are your main options if you're in this situation:
If you have the financial means, you can still sell your home and cover the difference between your mortgage balance and the sale price out of pocket. For example, if you owe $300,000 but the home only sells for $280,000, you would need to pay $20,000 at closing to make up the shortfall.
A short sale allows you to sell the home for less than what you owe, but it requires approval from your lender. If the lender agrees, they may forgive the remaining loan balance after the sale. Short sales can negatively affect your credit but are usually less damaging than a foreclosure. They also take more time to process due to lender approval.
If you're not in a rush to move, you may choose to keep the home, continue making mortgage payments, and wait for the market to improve. Over time, your loan balance will decrease, and the home's value may increase, helping you build positive equity.
If selling right now isn’t an option, reach out to your lender. In some cases, they may offer alternatives like a loan modification, forbearance, or other repayment options to help reduce your financial burden until your situation improves.
Important: If you're underwater on your mortgage, it's a good idea to speak with a real estate professional or financial advisor. They can help you evaluate your options and choose the best path forward based on your specific financial situation.
Most of the time, you can’t transfer your mortgage to the buyer when you sell your house. This is because most loans have a rule called a “due-on-sale” clause, which means you have to pay off the loan when you sell. So, the buyer will need to get their own loan to buy the house.
However, some loans, such as FHA, VA, and USDA loans, are assumable, allowing a qualified buyer to take over your existing mortgage under the same terms. Even then, lender approval is required, and not all buyers will qualify. If your mortgage is assumable, this can be a selling advantage, especially if your interest rate is lower than current market rates. To find out if your mortgage is assumable, review your loan documents or speak with your lender.
If you have a second mortgage or a Home Equity Line of Credit (HELOC), both must be paid off when you sell your home. These are additional liens on your property, and they need to be cleared at closing before the title can legally transfer to the buyer. The title company will request payoff statements from each lender and deduct the amounts owed from your sale proceeds. If your home's value doesn't cover all loans and closing costs, you may need to bring cash to closing or negotiate with your lenders. Also, HELOCs are typically frozen once your home goes under contract, so avoid drawing additional funds during the sale process.
Yes, you can get a mortgage to buy a new home before selling your current one, but it depends on your finances. Lenders will check if you can afford to pay both mortgages at the same time by looking at your income, debts, and credit score. If you have enough income and a good credit history, you may qualify. Some people use options like a bridge loan, a home equity line of credit (HELOC), or cash from savings to help with the down payment on the new home.
You can also make your offer to buy a new home “contingent” on selling your current one, which means the deal only goes through if your home sells first. While it’s possible, buying before selling can be risky if your current home takes longer to sell or doesn’t sell for as much as you expected. It’s a good idea to speak with a lender or financial advisor to understand what works best for your situation.
To ensure a hassle-free mortgage payoff when selling your home, follow these key tips:
In conclusion, when you sell your house, your existing mortgage is paid off at closing using the buyer’s funds, and any remaining equity becomes your net proceeds. While most mortgages require full repayment upon sale, some government-backed loans may be assumable under certain conditions. If you owe more than your home’s value, options like covering the shortfall, pursuing a short sale, or waiting to build equity may be available. By preparing ahead and understanding all costs, you can ensure a smooth and successful home sale.
If you're selling a home in Chattanooga and want to avoid the delays of traditional listings, working with trusted local cash home buyers like Manuel Capital can make the process faster and less stressful, especially if you still have a mortgage. We buy homes directly, including probate and inherited properties, and offer fast, all-cash closings with no fees, commissions, or repairs. Whether you're avoiding foreclosure or just want a quick, hassle-free sale, contact Manuel Capital today for a fair cash offer.
Andrew Manuel Writer
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