If you still have a mortgage on your Vermont home, you may wonder what happens to the loan when you sell the property. Do you need to pay off the mortgage before putting the house on the market? Does the buyer take over the loan? How does the lender get paid?

For most Vermont home sales, the process is straightforward. You generally do not need to pay off your mortgage before selling your home. Instead, the existing mortgage is paid from the sale proceeds as part of the closing process.

Understanding how the mortgage payoff works can help Vermont home sellers know what to expect and avoid surprises as closing approaches.

Can You Sell a Vermont Home if You Still Have a Mortgage?

Yes. In fact, it is very common for a homeowner to sell a property before the mortgage has been paid in full.

A mortgage gives the lender a security interest in the property. When the property is sold, that mortgage generally needs to be paid and discharged so the buyer can receive title without the seller's mortgage remaining as an encumbrance.

The seller's attorney typically coordinates the mortgage payoff as part of the closing.

For example, suppose you sell your Vermont home for $450,000 and still owe approximately $175,000 on your mortgage. At closing, enough of the sale proceeds would be used to pay the lender the amount necessary to satisfy the mortgage. The remaining proceeds, after other closing costs, adjustments and amounts due from the seller are deducted, are paid to the seller.

The Mortgage Balance Is Not Necessarily the Payoff Amount

One point that sometimes surprises sellers is that the mortgage balance shown on a monthly statement or online account is not necessarily the amount required to pay off the loan.

Before closing, a payoff statement is obtained from the mortgage lender or loan servicer. The payoff statement provides the amount necessary to satisfy the loan as of a specified date.

The payoff amount may include the remaining principal balance, interest through the anticipated payoff date and other amounts legitimately due under the loan. Because mortgage interest continues to accrue, the exact payoff amount can change depending on when the lender receives the funds.

For this reason, the closing attorney relies on an official payoff statement rather than simply using the principal balance appearing on the seller's most recent mortgage statement.

What Information Is Needed to Obtain a Mortgage Payoff?

The seller will normally be asked to provide information about the mortgage early in the closing process. This may include the lender or loan servicer, the loan number and authorization permitting the appropriate party to obtain payoff information.

Providing accurate mortgage information promptly can help prevent delays.

Vermont law provides procedures governing mortgage payoff statements. A mortgagee generally must provide a written payoff statement within five business days after receiving a qualifying written request.

If you have more than one loan secured by the property, such as a first mortgage and a home equity loan or line of credit, each lien may need to be addressed before or at closing.

How Is the Mortgage Actually Paid at Closing?

The seller generally does not need to personally send a check to the mortgage company immediately before closing.

Instead, the mortgage payoff is incorporated into the closing transaction. Funds from the sale are used to pay the lender according to its payoff instructions.

A simplified example might look like this:

Sale price: $450,000
Mortgage payoff: $175,000
Other seller closing costs and adjustments: $25,000
Approximate net proceeds to seller: $250,000

This is only an illustration. Actual closing figures can include real estate commissions, attorney fees, property tax adjustments, recording expenses, seller credits, other liens and additional charges or adjustments applicable to the particular transaction.

Before closing, the seller will generally receive a closing statement showing how the sale proceeds are being distributed.

What Happens to the Mortgage After It Is Paid?

Paying the mortgage debt and clearing the mortgage from the land records are related, but they are not exactly the same thing.

After the lender receives the full payoff, the mortgage must be discharged. The discharge provides evidence in the Vermont land records that the mortgage has been satisfied.

Under Vermont law, a mortgage may be discharged through a properly executed and recorded acknowledgment of satisfaction. Vermont law generally requires the mortgagee of record to execute and deliver a valid and complete discharge within 30 days after the mortgage has been fully satisfied.

The discharge is important because Vermont's municipal land records provide the public record of interests affecting real estate. A mortgage that has been paid but never properly discharged may continue to appear in a later title search.

What if an Old Mortgage Is Still Showing in the Vermont Land Records?

This is one of the reasons a title search is an important part of a Vermont real estate transaction.

Occasionally, a title search discovers an old mortgage that the homeowner believes was paid many years ago but for which no valid discharge appears in the land records.

The debt may have been completely paid. However, without a proper discharge or another legally sufficient method of clearing the mortgage, the land records may still show the mortgage as an outstanding encumbrance.

This can happen for several reasons. A lender may have failed to send or record the discharge. A discharge may have been recorded incorrectly. A mortgage may have been assigned to another lender, making it more difficult to determine who has authority to discharge it. The original lender may have merged with another institution, gone out of business or otherwise ceased to exist.

An old mortgage appearing in the title search does not necessarily mean the homeowner still owes the money. It does mean the issue needs to be investigated.

Can an Old Undischarged Mortgage Delay a Closing?

Potentially, yes.

If a mortgage remains of record, the buyer and the buyer's lender will ordinarily want satisfactory evidence that it has been paid and that the mortgage no longer encumbers the property.

The appropriate solution depends upon the circumstances. Sometimes obtaining and recording a missing discharge is relatively simple. Other situations require additional research into assignments, successor lenders or historical loan records.

Vermont law also provides procedures that may be available in certain circumstances when a lender received the mortgage payoff but failed to provide a proper discharge. For example, Vermont law permits a Vermont-licensed attorney to discharge a mortgage under specified circumstances when the statutory requirements are satisfied.

The important point for sellers is not to ignore an old mortgage simply because they know it was paid. The land records still need to properly establish that the mortgage no longer affects the property.

What if the Seller Has a Home Equity Line of Credit?

A home equity loan or home equity line of credit, commonly called a HELOC, may also be secured by a mortgage against the property.

This can require special attention because paying the current balance of an open line of credit may not automatically terminate the lender's security interest. Vermont law specifically addresses the discharge of mortgages securing open-end lines of credit and ties the discharge requirement to a written request to terminate the line together with payment of the amounts secured by the mortgage.

Sellers should therefore tell their attorney about all loans or credit lines secured by the property, even if a home equity line currently has a zero balance.

What if the Sale Price Is Not Enough to Pay the Mortgage?

Most sellers have enough equity in their property for the sale proceeds to pay the mortgage and other closing expenses.

However, if the amount owed on the mortgage and other liens exceeds the amount available from the sale, the situation becomes more complicated.

The seller may need to bring additional funds to closing or, depending upon the circumstances, obtain the lender's agreement to accept less than the full amount owed through a short sale or other arrangement. A seller should address this issue well before closing if there is any concern that the proceeds will not be sufficient.

What Happens to the Seller's Remaining Money?

After the mortgage, other liens, closing expenses and applicable adjustments have been paid, the remaining amount belongs to the seller.

Those net proceeds are typically disbursed following the closing in accordance with the closing documents and applicable requirements.

The seller's net proceeds can be substantially different from simply subtracting the mortgage balance from the sale price. This is why reviewing an estimated closing statement before closing can be helpful.

A Title Search Can Identify Mortgage Problems Before Closing

One purpose of the title search is to identify mortgages and other recorded interests affecting the property.

Ideally, any unexpected mortgage issue is discovered early enough to resolve it without delaying the transaction. An experienced Vermont real estate attorney can review the title, determine which mortgages need to be paid or discharged and work to address older mortgages or other title problems that may appear in the land records.

Sellers who have refinanced several times, used home equity loans or owned their property for many years may have multiple mortgage-related entries in the land records. That does not necessarily indicate a problem, but the title needs to show the appropriate discharges.

Selling a Home With a Mortgage Is Routine

Having a mortgage should not discourage a homeowner from selling. Paying an existing mortgage from the proceeds is a routine part of many Vermont real estate closings.

The key is making sure the correct payoff amount is obtained, sufficient funds are sent to the lender, the seller receives the proper net proceeds, and the mortgage is appropriately discharged from the Vermont land records.

Peet Law Group represents sellers in residential real estate transactions throughout Vermont. Our attorneys can help coordinate the closing, prepare the necessary seller documents, address existing mortgages and title issues, and help guide you through the process from contract to closing.

If you are selling a home anywhere in Vermont, contact Peet Law Group to learn more about our Vermont real estate closing and seller representation services.