What happens if I sell my house with mortgage arrears?

Selling a property with mortgage arrears usually involves repaying the mortgage from the completion funds, settling the arrears and agreed sale-related charges, and transferring the property to the buyer. The key issue is whether the sale price is enough to clear the lender’s redemption figure and any other sums secured against the property.

1. You notify the lender and appoint a conveyancer. Tell your mortgage lender about your intention to sell and instruct a solicitor or licensed conveyancer to handle the transaction. The conveyancer will check the title, communicate with the lender, deal with the buyer’s legal representative and establish the amount needed to repay the mortgage.

Mortgage arrears do not normally prevent you from putting the property up for sale. However, ignoring the lender or allowing possession proceedings to progress can make the situation more complicated. A voluntary sale may give you greater control over the transaction than waiting for repossession, but you should obtain independent legal and financial advice about your circumstances.

2. The lender provides a redemption statement. Your conveyancer requests an up-to-date redemption statement. This normally sets out the balance outstanding, missed payments, interest, early repayment charges where applicable, and other charges the lender has added to the account. The figure can change, so a statement prepared earlier in the transaction may need to be updated before completion.

If the lender has started repossession action, its legal or enforcement costs may also affect the amount required. Ask the lender or your conveyancer to confirm which costs have been included and whether any separate agreement is needed to allow the sale to proceed.

3. The property is marketed and a buyer carries out checks. You can use an estate agent, sell privately or consider a cash buyer. A cash sale can remove some of the dependence on the buyer arranging a mortgage, but it does not remove the need for title checks, property information, searches where required, conveyancing or lender approval of the repayment arrangements.

Give accurate information about the arrears and any possession notices to your solicitor. The buyer does not usually take over your mortgage arrears. Instead, the mortgage is dealt with as part of completion, unless the lender and all relevant parties agree to a different arrangement.

4. The sale proceeds are distributed on completion. On the completion date, the buyer’s solicitor sends the purchase money to your conveyancer. The conveyancer normally uses those funds in a defined order, including:

• repaying the mortgage balance and arrears;
• paying the lender’s permitted charges and any agreed enforcement costs;
• discharging other registered charges that must be removed from the title; and
• paying the conveyancing and other transaction costs.

Once the required sums have been paid, the lender can release its charge over the property. Any remaining balance is paid to you, subject to other liabilities or arrangements recorded by your conveyancer.

5. If the sale price is lower than the amount owed. This is known as negative equity or a shortfall. The sale cannot normally complete without dealing with the gap between the net sale proceeds and the sums secured against the property. The lender may agree to a shortfall arrangement, require a separate payment, or ask for additional information about your finances. Do not assume that accepting an offer automatically settles the debt.

Where the proposed price is below the redemption figure, ask the lender for its requirements before exchanging contracts. Your conveyancer should confirm whether the lender has given written authority to proceed and explain what liability remains after completion. A written agreement is particularly important where you are relying on a payment plan or contribution from another source.

6. If you have received repossession documents. A notice of arrears, a notice seeking possession or court papers should not be ignored. Selling the property may still be possible, but the lender’s legal timetable and any court order need to be considered alongside the conveyancing process. Contact the lender promptly and obtain advice from a solicitor, debt adviser or relevant housing advice service. If a court hearing is listed, attend it unless the court tells you otherwise, and take evidence of any proposed sale or offer.

Other issues can also affect the outcome. A second mortgage, charging order, restriction, bankruptcy, joint ownership, disputed title or leasehold problem may require additional consent before the property can be transferred. If the property is jointly owned, all necessary owners may need to sign the sale documents. Your conveyancer should identify these matters at an early stage.

Before accepting an offer, check:

• the current mortgage redemption figure, including arrears and charges;
• whether possession or other legal action has begun;
• the likely estate agency, legal, moving and property-related costs;
• whether another charge or debt is secured against the property;
• whether the expected net proceeds will clear the lender’s requirements; and
• what arrangement applies if the sale produces a shortfall.

Keep paying what you can and continue communicating with the lender while the sale is progressing. A sale is not complete until contracts have been exchanged and completion has taken place, so an offer or agreed asking price alone does not settle the mortgage arrears. The precise consequences depend on the mortgage terms, the lender’s actions, the title and the net amount available from the sale.