Selling a house with a mortgage: payoff and penalties

How does the payoff work?

In an ordinary sale the buyer does not take over your loan: the balance is settled from the proceeds and the remainder is yours after other closing items. A few loans can be assumed by a buyer, which is a separate process: see assumable mortgages.

The federal rule asks for the balance needed to pay the loan in full on a specified date. Ask for a statement dated near your expected closing, and ask for a new one if the closing date moves.

How do I get a payoff statement?

12 CFR 1026.36(c)(3) applies to a consumer credit transaction secured by the consumer’s dwelling. The key points:

• Who must provide it. A creditor, assignee or servicer must provide an accurate statement of the total balance needed to pay the obligation in full as of a specified date.
• How fast. Within a reasonable time and in no case more than seven business days after receiving a written request from you or from anyone acting for you, such as your agent or a title or escrow company.
• When it can take longer. Where the provider cannot meet that window, the statement is due within a reasonable time. The rule lists a loan in bankruptcy or foreclosure, a reverse mortgage or shared appreciation mortgage, and natural disasters or similar circumstances.
• Who is excused. A creditor or assignee that does not currently own the mortgage loan or the servicing rights is not required to provide it under this paragraph.

The Consumer Financial Protection Bureau also states that small servicers must provide a payoff balance within 7 business days of a written request. Put your request in writing and keep a copy, so the clock is documented. Ask for the figure early, because the largest deduction from your proceeds is the payoff. See the cost of selling a house for the full list of seller costs.

Does my loan have a prepayment penalty?

Many loans do not. Where a penalty exists, 12 CFR 1026.43(g) limits it for covered mortgages. A prepayment penalty is allowed only when the rate cannot increase after closing, the loan is a qualified mortgage under the listed rules and it is not a higher-priced mortgage loan. It must not apply after the three-year period following closing and cannot exceed these shares of the balance prepaid:

Look at the note you signed, or ask your servicer in the same written request as your payoff. Loans that were not subject to the rule, or older loans, are governed by their own terms, so read the document rather than assuming.

What if I owe more than the house will sell for?

Then the proceeds will not cover the payoff. No source Payotte read gives a standard remedy, so talk to your servicer first. If you are behind on payments, see the foreclosure rules by state. Payotte does not give advice on a specific case.

Is the sale taxable?

If your servicer held an escrow account, see escrow accounts for how it works. The sale can create a taxable gain: for your main home the IRS excludes up to $250,000 of gain, or $500,000 for a married couple filing jointly, when you meet the ownership and use tests in Publication 523. Details are in capital gains on a home sale.

What does a seller do, step by step?

1. Find your loan servicer’s name on a recent statement.
2. Send a written request for a payoff statement for a date near your expected closing.
3. Ask whether the note contains a prepayment penalty.
4. Give the statement to your agent or closing agent so the payoff appears on the settlement statement.
5. After closing, check that the loan shows as paid in full.

Where states differ

The payoff rules above are federal and apply nationwide. States decide whether an attorney handles the closing, who pays transfer taxes and what you must disclose. See the seller disclosure table, the transfer tax table and the page of your state. If you also plan to buy, read selling and buying at the same time.