Can I sell my house if the sale price doesn't cover the remaining mortgage balance?

It is possible to sell a property for less than the amount owed on the mortgage, but the lender must agree how the shortfall will be dealt with before the sale can complete. This situation is commonly described as negative equity. The mortgage lender’s legal charge normally remains against the property until the debt secured by it has been cleared or the lender has formally approved another arrangement.

The first step is to establish the exact amount needed to redeem the mortgage on the proposed completion date. This is not always the same as the balance shown on a monthly statement. A redemption figure can include accrued interest, arrears, administration charges, an early repayment charge and other secured borrowing. If there is a second charge, further secured loan or legal charge, each party’s repayment figure must also be considered.

Ask your conveyancing solicitor to request an up-to-date redemption statement from every secured lender. You should then compare the total redemption figures and selling costs with the expected net sale proceeds. Selling costs may include legal fees, estate agency fees, mortgage-related charges and any costs required to resolve title or property issues. This calculation shows the likely shortfall rather than relying on an estimated mortgage balance.

If there is a shortfall, the lender may require one of several solutions:

• You pay the difference from savings or another source of funds on or before completion.
• You provide evidence that the shortfall will be paid under an agreed repayment arrangement.
• The lender accepts a reduced settlement as part of a formally approved sale, sometimes referred to as a consent-to-sell or shortfall arrangement.
• Where more than one charge exists, the lenders agree how the sale proceeds will be distributed and how any remaining debt will be treated.

Do not assume that a lender will accept the best offer you receive simply because it is close to the mortgage balance. It may ask for evidence that the property has been marketed appropriately, an independent valuation, details of the proposed buyer and a full statement of income and expenditure. The lender’s requirements vary, so obtain its written approval before committing to an exchange of contracts.

Exchange of contracts is a significant point in the process. Once contracts are exchanged, the sale is normally legally binding. If you cannot provide the money required to redeem the mortgage or comply with the lender’s approved arrangement, completion may fail and you could face contractual and financial consequences. Your solicitor should confirm that the lender’s conditions have been satisfied before you exchange.

A sale does not automatically remove responsibility for any debt left after the property is transferred. Depending on the lender’s agreement and the circumstances, the remaining balance may continue as an unsecured debt. Interest, collection costs or enforcement action may apply if an agreed repayment plan is not maintained. Get the proposed terms in writing, including the amount accepted, the treatment of the remaining balance and whether any further interest or charges will be added.

If mortgage arrears, a possession claim or insolvency concerns are involved, take independent legal and debt advice before signing a sale agreement. A voluntary sale may help avoid some of the consequences of repossession, but it does not remove the need to deal with the mortgage debt. If you have joint borrowers, both parties may need to agree the sale and the treatment of the shortfall. Bankruptcy, an individual voluntary arrangement or other formal debt solutions can also affect what happens to the mortgage and should be assessed by a suitably qualified adviser.

Using a cash buyer can remove some aspects of a conventional sale, such as relying on a buyer’s mortgage offer or managing an onward chain. It does not, however, override the lender’s charge or guarantee that the sale price will cover the debt. Before accepting an offer, provide the proposed figures to your solicitor and lender and check that the buyer’s timetable is compatible with the approval process.

In practical terms, prepare a realistic statement of the property’s value, request current redemption figures, list every secured debt and calculate all selling costs. Then discuss the projected shortfall with the lender and obtain written confirmation of its requirements. The sale can proceed only when the lender’s security and any remaining debt have been addressed in a way it accepts.