How to sell a Mortgaged Property?

With increasing property prices and increased convenience of Home Loan, its hard to buy any property without taking home loan. Home loans are typically long term loans anywhere between 5 years to 30 years. In such a long period you might want to sell your property which still has home loan outstanding on it.

Below are some questions which come to mind when you think of buying or selling a Mortgaged Property.

1. Can you buy or sell a mortgaged property?
2. If yes How to sell a mortgaged Property?
3. What is the tax implication of the transaction?

Well the answer to the first question is you definitely can buy or sell a mortgaged property, but the process is not as simple as in case of loan free property.

There can be two scenarios of selling a mortgaged home, depending on buyer preference:

Case 1: The buyer is ready to buy the mortgage home with home loan

Case 2: The buyer does not want home loan.

We take both cases one by one.

Case 1: Buy with Home Loan

The following steps need to be followed:

1. Seller can enter into an agreement with buyer for sale.
2. The buyer gets his home loan sanctioned/ pre-approved.
3. The buyer would needs to make an arrangement with his lending institution or bank to directly deposit the agreed amount in the seller’s loan account.
4. The seller can now transfer the property to the buyer and settle the loan amount with his own lending institution.

In case the buyer agrees to take loan from the same lending institution as seller the processing money and time for the entire transaction is greatly reduced.

Case 2: Buy without Home Loan

The following steps need to be followed:

1. The seller has to take a written statement from his lending bank with a declaration that the bank would return all the original documents/paper of the mortgaged property after final settlement.
2. The seller shows the above document to buyer and the buyer pays money to the seller.
3. Once the seller receives money from the buyer, it is deposited with the lending bank and all the original documents along with a ‘no dues’ certificate is received.
4. The documents are provided to the buyer to complete the transaction and transfer the property.

In some cases where the buyer may not be ready to pay the complete sum in advance, the seller may need to arrange the gap in funds from other sources till he gets the full amount from the buyer.

Essentially here the seller has to close the loan before he gets his home documents, the funds for which can be taken from the buyer as token amount or a short term loan. This transaction is more risky for both seller and buyer.

Tax Implication on Sale:

The seller should always keep in mind about the tax implications due to a property transaction. A sale within three years would attract short-term capital gain (STCG) while that above three years would be liable for a long term capital gains tax (LTCG).