Instructions and procedure

If you are considering selling a property with a mortgage and don't know how to proceed because of a lien on the property, don't worry. Selling a property encumbered by a lien is common practice and there is no need to worry. The key is to plan the steps of the sale correctly, taking into account the specific requirements of potential buyers, including how to finance the purchase of your property.

The procedure in brief and in points:

It is not necessary to have your own money to repay the mortgage obtained when selling the property, so there is no reason to worry.
How the transaction proceeds depends on whether the buyer pays for the property out of his own resources or with the help of a mortgage, but neither option is problematic.
To ensure a smooth sale, it is important to get the timing and coordination right for both parties and the banks involved.
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It's important to note that most potential buyers for your property will not want to assume the lien that attaches to the property as security for the mortgage. It is essential to ensure that the lien is extinguished and removed from the Land Registry. This can be done, for example, by paying off the mortgage before selling the property, but this can be difficult due to lack of funds. The most common solution is therefore to pay off the mortgage during the sale process itself, with the help of the buyer's finances or their bank. It is important to coordinate this process well with both parties' banks.

How to sell a property with a mortgage?

It is important to consider how the buyer will finance the purchase of your property. If the buyer will be paying with their own funds, they will usually put the full purchase price into escrow and a portion of this amount will be used to pay off the mortgage once the transfer of ownership has taken place. This procedure provides the buyer with the assurance that, although the property is encumbered by a mortgage at the time of conclusion of the purchase contract, this mortgage will be released during the subsequent settlement of the purchase price and the buyer will thus acquire the property without any restrictions.

If the buyer is financing the purchase of the property partly with a mortgage loan, the process will be similar, but with the difference that the buyer's bank will not transfer part of the money into escrow, but will pay it directly to your bank to repay the mortgage. In this way, the buyer's bank will ensure that your old lien is effectively cancelled and its new lien will be first priority.

There is another important fact related to this procedure, namely the creation of a second lien on the property you are selling. The new lien is to secure the money the bank is lending to the buyer to purchase your property. Although this is a foreign debt (the buyer's debt to the bank) from your perspective, your property will at some stage serve as security for this foreign debt. While this may not be convenient for the buyer, mortgage practice does not allow for any other solution. On the other hand, this practice usually does not cause major problems because the lien is a property right and shares the fate of the thing it encumbers. Thus, once the title to your property is transferred, the new lien passes with the property to the buyer.

Correct timing saves nerves

It is necessary to set the correct date for the repayment of the mortgage when selling your property. This date will be different depending on whether the buyer is paying the purchase price from their own funds or from a mortgage loan. The bank will calculate all its claims on the required date in order to achieve the extinguishment of the mortgage on your property. The lien and the debt are accessory, so the lien will always extinguish together with the debt it secures.

You don't have to worry about selling a property that is encumbered by a lien because it is not a major obstacle. On the contrary, nowadays, selling a property offers interesting business opportunities that can help pay off not only the mortgage tied to the property being sold, but also second mortgages on other properties. If you have an existing mortgage with a fixed term that will end soon, this may seem like an interesting solution, especially given the ever-increasing mortgage rates.

It is important to remember that the sale of a mortgaged property requires careful planning and coordination between the parties and their banks to make the entire process successful. If you have any doubts about the planning or execution of the various steps, you should consult with professionals who can help ensure the smooth running of the entire process.

The author of the article Miroslav Pleva is a real estate attorney cooperating with a franchisee of the RE/MAX real estate agency network.

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