Do I have to pay off my mortgage when I sell my house?

Factual Questions
1

We’ll be moving soon and we could use some cash when we do. We’re selling our little condo and probably won’t walk away with any cash and we may even be upside-down a bit (hello housing crisis…at least we didn’t pay much to begin with!).

I had the following bright idea while running: Maybe I can cash the check from the buyer, pay most of it to the mortgage holder (B of A, still alive at this writing), and pocket the rest, remaining in a few thousand dollars debt to B of A at a modest 5% interest rate. Sweet!

But two problems occurred to me: (1) The buyer probably doesn’t write us a check, since we don’t own the place, right? (2) The mortgage is secured by the house, so therefore the bank wouldn’t be keen on this even if we did get the money directly from the buyer.

Is there any chance that my first, more hopeful idea is possible? If not, how do we pay the remainder of the mortgage if we can’t sell it for enough $ to pay mortgage + fees? I sure hope we can get a bank loan to pay off the bank loan, otherwise it will be joining a growing list of friends on the Visa…

(Personal note, our income will be rising dramatically after this move and all the short-term debt we’re taking on will be rapidly eliminated, so don’t worry about us!)

2

In a standard mortgage loan held by a bank your condo cannot be transferred to the new buyer without satisfying the existing loan obligation to B of A. A partial payment to B of A at closing with you retaining proceeds is not within the range of payoff options offered by major banks

3

If you could accomplish that, you probably would be defrauding the buyer, since the buyer is paying for a house with a clear title, i.e. one free from your mortgage.

But it’s unlikely you would accomplish that, since any money the buyer comes up with (i.e. his down payment and the proceeds of his mortgage) will first be used to pay off any existing mortgages.

You could take out an unsecured loan and bring the money to the closing. If you are in serious trouble, you might try contacting your bank. Who knows? Maybe they will agree to cram down your mortgage and put the balance into an unsecured loan.

4

Yeah, I figured. Crap. Depressions are depressing.

5

I’d say that’s putting it mildly.

6

Yes, that’s exactly what it was.

7

It occurs to me now – this may be a pretty urgent issue. As in, if we sell the house before finding a way to pay off any remaining mortgage debt, we may be in hot water.

Let’s say I agree to sell the house tomorrow for $5000 less than what I owe on the mortgage, and let’s say that I don’t have $5000 in the bank (which is quite an easy thing for me to say). What happens to me? I have to assume that the mortgage holder will work something out with me, right?

8

Never mind, I found my answer and it’s “you’re screwed”. Time to start developing contingency plans…

9

That would be called a short sell, and you would need the banks OK before close of escrow.

At close the seller does not get the check from the buyer. At the closing of escrow the buyer will write out a check to the escrow accont for the buyer’s closing costs plus down payment. At the same time the buyers lending bank will also deposit the loan amount into the escrow account. From the escrow account the escrow company will pay all necessary fees, then send the bank the pay out amount. You are not given a chance to hold back what you want. If the amount from the escrow company is not enough to pay off the loan, the bank should return the check, and not sign over the deed to the new owner’s.

I had that happen when I sold my frist house. It took me explaining to the escrow company that I was about to contact a lawyer before the would complete their job two months later, cost them over $500 in additional interest.

I also had a bank give the escrow company the wrong payout amount. They cashed the check and kept my account open. After they found out that they had an unsecured loan for $1500, now they asked to meet. My wife and I set the payoff rate. We ended up with an interest free loan and a payoff rate of $30 a month.

PS think twice before getting a home loan from a credit union.

10

Real estate person checking in. The buyer does not pay you anything. The attorney hands out the checks from their escrow account. If you want to see an attorney go ballistic, suggest they fuck with their escrow monies.

Every closing in New Jersey (and I think in the country) is required to have a HUD-1 form filed with the government. It shows where the money came from and where it all went to. It has to be 100% accurate.

You also have to have a title search, showing that the house is owned free and clear and there are no liens on it. Any unpaid mortgages would show up and would have to be paid off.

We’ve done a few short sales, and they are the deals from hell. Every thing has to be documented, because the bank is afraid the seller might walk away with an extra nickel.

In short, unless you get your mortgage company’s okay, there is no way you could do this. The house is your mortgage collateral, and when you sell it you have no more incentive to pay the mortgage.

11

Which agency do you file the HUD-1 with?

The real “problem” with your plan is title companies and mortgage companies. If the buyer is getting a new mortgage, guess what? They want first lien position. If you don’t pay off the existing mortgage, they don’t get it. So they’ll hire a closing agent (or escrow) to handle the closing. In order to close the deal they’ll make sure the taxes are current, and the utilities are current (or create an escrow to cover them), and they’ll want a payoff from the existing mortgagee. They’ll add all that up, get a check from the buyer’s mortgage company and if there’s a shortage, you’ll need to bring a check for that amount to closing. Once the money is collected the closer will cut checks. You’ll never get your hands on the cash.

Even if it was a cash transaction, the buyer would probably purchase title insurance. The title company would condition the insurance on payoff of the existing mortgage, or not it as an exception.

If you were somehow able to trick the existing mortgage company into releasing the mortgage based on your promise to pay off the mortgage, you’d be liable for fraud, and possibly subject to criminal prosecution. You could, as others note, arrange a short sale, under some circumstances.

12

Please allow me to state for the record that I had no intention to trick or otherwise deal dishonestly with anyone. I just wondered if the bank would let me retain a small portion of my debt to them after the house is sold, repaying it at the normal mortgage schedule. My suspicions were that this isn’t possible, and thanks to this thread I now realize how true that is.

13

Yeah. I’m not worried about it.

You didn’t specifically ask about this, but I’ll give you a bonus answer: Some mortgages are “assumable,” which means you could, theoretically sell the house with the mortgage intact and have the buyer assume the payments, assuming they qualified. Other mortgages have a “due on sale” clause, which makes it a default to transfer the property, even if you continue to make the payments. I’ve also read about mortgage products from other countries, which are “portable.” As I understand it, you’d tell your existing mortgage company that you’re buying a new place, they’d arrange to secure the balance of the mortgage against the new property and release the mortgage on the one you were selling. I assume you’d have to either have cash or another mortgage to acquire the new property, and that probably means your existing mortgage company would need to loan you more money and tack that onto the mortgage, but I’m really speculating here, because I’ve only read a few articles that mention this type of mortgage. I don’t really know how they work, or if they’re available anywhere anymore.

14

This is a common notion, but it’s not true. The condo is your property. You own it, not the bank. But you also owe a large debt, which you have used your condo to secure. In legal terms this is a lien and the property is encumbered: you still own it, but you may not dispose of it without the lienee’s consent or until the lien is cleared.

Another common misconception is that in foreclosure, the bank “takes your house.” Also not true. Laws (and contracts) vary, but the standard is that in the event of mortgage default, the mortgagee has the right to force the sale of the property, not seize it outright. Typically this is done at auction, and if the auction does not fetch enough to satisfy the obligation, then the mortgagee can take possession of the property. If the auction fetches more than the outstanding debt, the balance is returned to the mortgagor… just as in a normal, voluntary sale.

Disclaimers:
[ol]
[li]This is as pertains to U.S. law; other jurisdictions may vary[/li][li]I am not a lawyer. I’m also very prone to speaking authoritatively on subjects about which I know little. Take with grain of salt.[/li][/ol]

Well, you’ve basically got two options. First is to pay the balance out of pocket… either with the gobs of cash you’ve got lying around cluttering your floor, or by borrowing it. Second is to just walk away and let the property go into foreclosure. This option is apparently quite popular, but I don’t get it, myself. Not only would it shred your credit for a good long time, but it’s also IMO dishonorable: you borrowed the money, you owe the money, pay the money back.

If you decide to go with the first option but need to borrow to fund the balance, the first thing I’d do is set up a meeting with your mortagee and talk about it with them. Banks don’t like foreclosures, which are expensive. They may be willing to work out a deal… perhaps release the lien and transfer the balance to an unsecured loan at a higher (but hopefully less than Visa’s) rate.

Good to hear it. May the real estate market where your condo is undergo a sudden boom, the real estate market where you’re buying undergo a sudden bust, and everything work out for the best.

15

I have read that now is a very good time to negotiate with lenders to avoid foreclosure. Normally, banks looks at foreclosures as a cost of doing business, however since the foreclosure rate is so high presently, the banks are trying to do anything they can to avoid them. Most banks should jump at the chance to convert negative home equity into a regular loan if you have good credit and the alternative is foreclosure.

16

You definitely won’t be able to do this, as others have said. When you go to closing, the buyer’s money will be processed through the settlement company, which is responsible for satisfying the old loan. If they bring a check themselves, typically that’d be made out to the settlement company. If the purchase price is greater than your old loan’s payoff amount, the settlement company will wire you the proceeds within 24 hours or so.

If the purchase price is less than the payoff amount, one of several things have to happen for the sale to go through: You come up with the difference yourself somehow (which sucks, but can be expeditious - I knew several people who had to do this to get out of their condos in the 90s). Or, your mortgage company agrees to a short sale (they accept less than the mortgage amount), which is problematic. Short sales are very hard to get approved, they delay the process quite a bit, banks are often very slow to respond to requests for short sales, and buyers can just walk away if it takes too long. Also, the difference MAY be treated as taxable income to you, as it represents a forgiven loan. Say you owe 100,000 and you sell for 90,000 - you’ll likely have an income tax hit on the 10,000.

If you’ve got a buyer on the hook, and there’s any way you can come up with that difference (whatever it is), don’t risk the deal by attempting a short sale.

17

Yeah, my plan is to get a source of cash (in-laws, most likely) in case we can’t keep the sale price above the money-loss cutoff.

18

I think the answers from our real estate pros are spot-on and comprehensive, but if I may, here’s the reason in a nutshell: Your loan from the bank was secured by the house, so that if you didn’t pay the loan, they could take the collateral (the house). Once the house is gone, there’s no collateral left for the loan. Banks never (almost never?) lend money without collateral. If you can’t give them recourse to an asset to secure repayment (like a house or a car), they won’t lend you the money. They likely wouldn’t lend anybody money on those terms.

19

In the early 1980s, assumable mortgages were very big, since the interest rates suddenly jumped and assuming a 6% mortgage was much better than getting a new 12% one. This did not involve the mortgage being underwater though, and I know of people who walked away from their mortgages. I think it would be slightly difficult to find a buyer to assume a mortgage larger than the value of the house, especially now that interest rates for new loans are low.

20

Not to mention that the reason the current owner is under water is that you could by the house next door at a substantial discount because housing prices have fallen.