Can you sell a mortgaged house?

Is it possible to sell a mortgaged house? You want to sell your mortgaged house or flat. How do you go about it?

What is a mortgage?

Mortgages belong to the category of security interests.

The concept of security refers to all the guarantees that a creditor can take out to secure payment of his claim.

Securities may be personal or real.

Personal sureties are attached to a person. One naturally thinks of surety bonds, although article 2287-1 of the Civil Code envisages two other hypotheses:

The personal sureties governed by this Title are surety bonds, independent guarantees and letters of intent.

Collateral securities are attached to real estate. They are defined in article 2323 of the Civil Code:

A security interest is the allocation of an asset or a group of assets, present or future, to the preferential or exclusive payment of the creditor.

The rights of the mortgagee

The mortgagee has a preferential right and a right of resale.

The preferential right allows the buyer to be paid according to his mortgage ranking at the time of the sale.

Resale rights are defined at article 2454 of the civil code :

If the property is sold, the mortgage is transferred to the third party purchaser.

The third party purchaser is thus obliged, within the limits of the registrations, to pay the entire guaranteed debt, in capital and interest, whatever the amount.

If the mortgage remains unpaid, the mortgagee may take legal action for the sale of the mortgaged property under the conditions set out in Book III of the Code of Civil Procedure. code of civil enforcement procedures.

In other words, the mortgage follows the property even if it changes hands. The mortgagee therefore has the option of seizing the property from the third-party purchaser. The original debtor's debt will then be paid from the proceeds of the sale of the purchaser's property.

This is why the notary, when he receives a sale, asks the mortgage creditors if he can proceed with the cancellation of their registrations. The mortgage creditors are then informed of the sale and ask for their claims to be reimbursed. This mechanism is quite common. It occurs, for example, when there is an outstanding loan at the time of the sale.

Which brings us to the second point: mortgages.

Home loan: earmarked loan

Credit agreements fall into two categories: unrestricted credit and restricted credit.

Non-allocated loans, such as consumer credit, credit revolvingetc., can be used to buy anything.

Earmarked credit, on the other hand, must be used to purchase a specific item.

A home loan is an earmarked loan (Article L. 313-1 of the French Consumer Code). This means that the purpose of the loan is to purchase a property. If the property is sold, the loan no longer serves any purpose. The loan is then automatically terminated and the bank can demand repayment of the outstanding capital.

When the property it has financed is sold, the bank is obliged to cancel the loan. It then asks the notary to make early repayment of the loan from the sale price. In return, it discharges its mortgage registrations.

The cost of release

The release of mortgage registrations will nevertheless have a cost.

Firstly, the bank will receive an early repayment charge. Early repayment will prevent it from receiving the agreed interest. To compensate for this loss, it will receive an early repayment charge. The maximum amount will be 3 % of the capital outstanding before repayment (article R. 313-25 of the Consumer Code).

• Read also : Understanding early repayment indemnity

In addition, publication of the deed of cancellation in the property register gives rise to the collection of release fees, which will consist of :

• A fee to pay for the notary's work,
• The cost of disbursements incurred by the notary,
• Charges and taxes levied by the tax authorities.

The total cost of cancelling a €350,000 mortgage, for example, is estimated at 0.2 to 0.3 %.

The property file

When the notary receives a sale, he must consult the property register. This file lists all transfers of ownership (donations, sales, etc.) and all security interests (mortgages, etc.) relating to the property. This enables them to understand the situation of the property and provide the buyer with all the necessary guarantees.

This also means that the notary will check whether there is a mortgage, and that the lending bank will be asked to remove it.

We are often contacted by sellers hoping to sell without repaying the bank. The aim is generally to use the sale price to buy a new property. In times of rising interest rates, this means they can continue to benefit from the interest rate on their first loan.

As we have seen, this practice is illegal because a property loan is an earmarked loan. If the property it finances is sold, the loan is cancelled.

Mortgages and guarantees

However, not all home loans are secured by mortgages. Banks sometimes prefer to use surety companies. When this is the case, no mortgage is published in the property register.

The notary then has no way of detecting that the property has been purchased using a loan. If the seller says nothing, then the bank will take place without the lending bank being reimbursed.

This practice is illegal, as the credit is not restricted solely to the bank. It is also a commitment made by the buyer. If the buyer does not honour his commitment, he is in breach of the terms of the contract he has entered into.

As these operations are often envisaged with a view to a new purchase, this makes the edifice fragile. If the bank becomes aware of the problem, it will immediately terminate the contract. It will then collect the loan and attack the debtor's assets. Given the sums that are usually involved, this can quickly lead to property seizure proceedings.