by Marija Josifovska
by Marija Josifovska
What happens if you decide to sell the land you’ve purchased on a mortgage? Can you sell part of your property on which you still haven’t paid off the loan in full?
Mortgaging a piece of property doesn’t change what you can do with it. Unless you owe more than your property’s value or your mortgage is specifically written to limit your ability to sell, it won’t stop you from selling the land or part of it. However, the process involves some important legal considerations and paperwork.
Let’s discuss how you can sell part of your property with a mortgage on it and what unique challenges you might face.
Mortgage and Reselling Land: Is It Possible?
Most people go for a mortgage when buying land as a long-term investment. The mortgage is registered on the title deed and indicates that the lender has a legal interest in the property. If you fail to repay the loan, the lender has the right to sell the property to recoup the money.
To sell part of your land, you need a clear deed to the plot of land. This means you need to clear all property liens, including the mortgage. Without a clear title, selling can get complicated. You’d have to receive a partial release of the mortgage. Thus allowing the sale of a portion of a property but keeping the mortgage on the rest.
When buying a property, people are usually focused on securing the finances and learning the easiest way to get the mortgage. Therefore, it’s unlikely they will take an interest in reading the complete documentation they sign. However, when thinking, “how do I sell part of my property” the clauses in mortgage contracts can help you find the answer.
Understanding The Due-Of-Sale Clause
The due-of-sale clause protects the lenders if the borrower transfers the title to the land parcel without paying the loan in full. Instead, it states that the borrower must pay the total amount of the remaining mortgage if any part of it is sold. Also known as the “acceleration clause”, the due-of-sale allows the lender to call the loan due and payable if there’s a risk of losing money.
With that in mind, to sell a part of the land you have mortgaged, you must inform the lender and ask them for approval. Without obtaining the lender’s approval, you risk financial and legal liability.
Getting a Partial Release of Mortgage
There is a way to sell part of the property that is still under a mortgage lien. You can make this arrangement with your lender after paying your mortgage for at least one year. Usually, the partial release of a mortgage involves specifying deatiled information. Such can be which portion of land is still under a lien and which has a clear title to be sold.
For example, if you’ve purchased a 3-acre piece of land and a developer wants to buy 1.15 acres of your land. You’ll have to show the lender that selling that part of the land won’t leave them with 1.85 acres that are less valuable than the remaining principal on loan. If the equity in your property is sufficient, the lender will approve the partial release of your mortgage. Then, you’ll be able to sell the 1.15 acres while still having a lien on the remaining part.
Laying the Groundwork for a Partial Release
If you want to obtain a partial release of a mortgage, you’ll have to examine the regulation included in your borrowing plan to determine whether this process is allowed. In some cases, lenders might explicitly prohibit partial releases. If that’s not the case, contact the lender for a release schedule if that’s not the case.
The release schedule should clarify which parts of the land can be released and what percentage of loan repayment would occur with it. For instance, if you’re hoping to sell a portion of your land, your release schedule will clearly state when such a sale is allowed. Without lender approval, you cannot proceed with the land sale.
Once you obtain eligibility for a partial release, you may need to hire a licensed surveyor. This person will perform a legal survey of your property. The survey is critical in situations where the geographical bounds of the land covered by the mortgage have changed. It’s best to consult with the lender if there’s a need for such steps. Similarly, your lender may ask for an appraisal of the land covered by the mortgage.
Check zoning rules
Moreover, you should contact the county’s zoning office. Check the zoning rules and requirements and ask for permission to subdivide. Before granting permission, the zoning office will have to review the appraisal, survey, and similar information. Be prepared to obtain the required instructions from the zoning board and follow them closely.
If all goes well, the lender should provide you with an application for the partial release, which should be completed before proceeding. The lender might ask for a partial loan payoff to preserve the loan-to-value ratio of its collateral. Alternatively, they might ask you to pay out the current equity to allow a partial discharge. The decision would depend on how much the sale would change the value of the land under the mortgage.
Elements of a Partial Mortgage Release
The legal document called Partial Release of Mortgage should outline the release date, the borrower’s data, the lender’s name, and its representative’s name. It should further include the following:
- Information regarding the original loan
- The property’s state and county
- A statement of release from the mortgage on the specified area
- A description of the remaining mortgaged land
- A statement that the mortgage is still valid on the remaining piece of land
- Acknowledgment of the instrument’s execution authorized by a notary
Finally, if approved, you’ll need to file related legal documents with the local recorder. There are many moving parts involved in the partial mortgage release process. So, expect the approval to take at least several weeks.
How Do I Sell Part of My Property: Final Thoughts
As a property owner, you have full rights to a piece of property, so you may sell any part of it unless a legal agreement prevents you. If a property is mortgaged, you can subdivide parts to sell but only with the lender’s approval. Otherwise, you’re risking triggering the loan’s due-on-sale clause and might need to pay off the total mortgage. To sell a part of the land you should get a partial release of mortgage. The process might seem complicated, but hopefully, we helped you get a better idea of what it involves.