Selling a House With a Mortgage Lien: How Does It Work?

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Selling a house with a mortgage lien. A man holding a sign with mortgage lien written on it and a wooden house.
If you're considering selling a house with a mortgage, you may be wondering how it works. Learn when and how the mortgage is paid off.

If you’re considering selling your home but still have a mortgage lien on the property, you may be wondering what the process is to pay the loan off.

How does selling a house work when you have a mortgage? 

On closing day, the buyer wires their down payment and any closing costs to escrow. The buyer’s lender then funds the loan by wiring the purchase price balance to the same escrow account. When the home records and is officially sold, the title company disburses all funds to any parties owed, including your mortgage company. Any remaining balance, also known as equity, will be wired to the seller.

In this article, you’ll learn more about the different liens you may have on your house and the escrow and home selling process to pay them off.

Model of house on top of cash

What is a lien?

A lien is a legal claim against a property. More specifically, it’s a security interest in a property that the owner granted to secure debt payment for an obligation.

There are two types of liens: voluntary and involuntary. Voluntary liens are placed on a property by the owner, usually to secure a loan. Involuntary liens are placed on a property by creditors, such as the government or homeowners association.

When a property with a lien is selling, the owner must pay off the debt to complete the sale. The proceeds from the sale will go towards paying off the outstanding debt. The remaining equity will go to the property owner.

Mortgage liens.

Mortgage liens are the most common type of lien. The lender will place a lien on your property when you take out a mortgage. The lien gives the lender the right to foreclose on your home if you default on your loan.

The county recorder’s office keeps all records of liens on file. All liens are public and can be viewed online at the respective county recorder’s website.

Other types of liens may be on your home.

Other types of liens may be on your property besides a mortgage lien.

  • A mechanic’s lien is placed against a property when the owner fails to pay for repairs or improvements made to the property.
  • An IRS tax lien is placed against a property when the owner owes back taxes to the government.
  • A homeowner’s association lien is placed against a property when the owner fails to pay their HOA dues.

The process of selling a house with a mortgage lien

When selling a house with a mortgage lien, the borrower must pay the lender before receiving funds. Pay-offs are completed at the close of escrow.

The proceeds from the home sale will go towards paying off the outstanding mortgage balance. If there is any money left over, the homeowner will receive the funds. Those funds are known as equity.

Understanding equity.

Equity is the portion of the home’s value that the homeowner owns. For example, if a home is worth $500,000 and the outstanding mortgage balance is $400,000, the homeowner has $100,000 in equity.

When you make a mortgage payment, the portion of your payment going towards principal becomes your equity.

The escrow process.

Once a home is listed, and an offer is accepted, the agent opens escrow with a title company. Title companies are neutral third parties. Their role includes:

  • Ensure a clear title.
  • Collecting all monies.
  • The final signing of closing documents.
  • Recording of the deed.

The title company will request a pay-off quote from a mortgage servicer—and any additional lien holders—to determine how much is outstanding on the mortgage.

Both parties will receive a preliminary title report detailing liens, encumbrances, and easements. As a seller, review this report closely to verify that no liens exist you’re unaware of or that none are missing that may cause an issue down the road.

If you have an open home equity line of credit, you can call the bank in advance to request a freeze and hold. The freeze guarantees that a seller won’t access the account before closing. Be sure to ask for proof of the freeze so you can provide it to the title company.

The magic happens on closing day.

On closing day, the title company receives funds for the purchase from the buyer and their lender into the escrow account. When all monies are received, the file is sent to the county recorder’s office to record officially. Once the recording is posted publicly on the county recorders’ website, the home is sold.

Upon confirmation of recording, the funds collected for the purchase are disbursed to pay the seller’s creditors and any closing costs associated with selling. The remaining funds, if any, will be wired to the homeowner.

In conclusion.

Selling a house with a mortgage is simple since processes are in place to locate and pay off liens.

Once you receive an offer and escrow is opened, remember the following tips:

  • Review the preliminary title report to identify liens on your house.
  • Call and place a freeze on any home equity lines of credit.
  • Review the settlement statement provided by the title company before closing.

You can perform a title search on your own by visiting your local county recorder’s website. For Clark County, NV residents, here’s a link to the website for the Clark County Recorder | Official Site.

A First&Sold agent is always available to help if you have any questions. 

Good luck on the sale of your home!

About The Author

Picture of Travis French

Travis French

On a 750-mile trek across 4 states, I felt the void: good info on places to live was missing. So, I started gathering. Today, I'm still searching for my perfect place alongside you and adding each bit of helpful information I discover along the way. —Writer, Home Advisor, & Owner of First&Sold. NVRED Lic #S.0182305

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