Selling a Mortgaged Property: A Guide for Sellers and Buyers

Is it possible to sell a mortgaged property?

Will anyone buy my house?

I would like to sell an apartment, but it is encumbered by a mortgage. What can I do?

Who can I turn to for help?

How long will it all take?

What costs are involved?

Can I even do this?

If you are one of those troubled by these and similar questions, you can finally breathe a sigh of relief. This guide will clarify the key questions about what to do with a property you want to sell that carries an additional encumbrance, namely a mortgage.

Whether you are the seller or the buyer, it is perfectly understandable that you want to protect your interests. Fear and frustration are also common reactions to the process of dealing with a property transaction. That is exactly why we have prepared this guide: to ease your fears and prepare you for everything you need to take into account.

It is crucial that the seller does not hide from the buyer the fact that the property being sold is mortgaged. Selling a mortgaged property – what does it actually involve? First of all, let us clarify exactly what a mortgage is. The definition of a mortgage can be found in the Ownership and Other Real Rights Act (Official Gazette 81/2015). A mortgage is a lien that follows the property regardless of who owns it. A mortgage on a property exists as a means of securing the creditor's claim that a certain monetary obligation will be fulfilled by the debtor. As you already know, the bank uses a mortgage to secure that you will repay the money you borrowed from it. This security also applies if circumstances arise in which you are unable to repay the loan. Whether we like it or not, that is how things work, because you agreed to it when arranging the loan. But what happens to the mortgage when you want to sell your property? Regardless of the reason for selling, the mortgage is an encumbrance on the property for as long as the debt obligation to the creditor lasts. However, it is important to know that a mortgage encumbrance does not restrict the sale or transfer of that property. In other words, selling a mortgaged property is not prohibited. It is therefore possible to sell an apartment or a house that is under a mortgage. Although selling a mortgaged property may sound complicated and time-consuming, there are three solutions. Depending on the options available to the seller and the buyer, one of the following can be chosen.

You can find more details about mortgages here – https://imperium-immobiliare.hr/blog/trziste/hipoteka-zalozno-pravo-na-nekretnini/

Selling a mortgaged property – what does the solution look like?

The first option is at the expense of the owner of the mortgaged property. The owner wants to sell the property under a mortgage and undertakes to pay off the part of the loan needed for the bank to close the debt secured on that property. If the seller intends to do this, then, once the decision to sell has been made, they will arrange early repayment of the loan secured by the mortgage with the bank. The bank will issue a "letter of intent for loan closure". This document states the exact amount of the outstanding debt on the loan. The seller must pay this amount before selling the property. This bank document is an official instrument. With it, the bank guarantees that, once the debtor has fulfilled the obligation, it will approve the deletion of the mortgage lien on the property in question. This means that once the loan has been repaid in full, the property will be released from the mortgage encumbrance in the land registry (zemljišna knjiga). Early loan repayment is necessarily accompanied by a bank fee for early repayment. The amount of the early repayment fee is stated in the loan agreement, which you signed with the bank before the loan was disbursed. You can find out the exact amount of the early repayment fee from the bank where you took out the loan. After the loan has been repaid, the bank issues a "deletion statement" (a consent to deregistration of the mortgage, known in Croatian as brisovnica). The property owner submits the bank's deletion statement to the land registry department of the municipal court. Together with this document, a "motion requesting deletion of the mortgage" on the property must be submitted. A court fee must be paid for the deletion of the mortgage lien on the property. Once the owner receives confirmation that the mortgage lien on the property has been deleted, they can proceed with the sale of the property without hindrance. The second option applies when the outstanding amount of the owner's loan is lower than the purchase price of the property they wish to sell. In that case, the buyer pays the remaining loan debt to the bank where the owner took out the loan (the creditor bank). The buyer then pays the difference up to the full purchase price into the seller's account. This is a so-called payment into two accounts on two grounds for the same purpose. Put more simply, it works like this: the first part of the payment goes to the bank's account towards the mortgage loan. The second part goes to the seller's account as the difference up to the full purchase price of the property. Once the bank receives the payment towards the loan and closes the loan debt in full, it will issue a "deletion statement". On the basis of the deletion statement, the mortgage lien on the property that was the subject of this transaction is deleted. In practice, this means the following: Ivan is the seller of a mortgaged property. Ivan took out a loan from the bank, which is why there is now a mortgage on the property. Ivan still owes the bank EUR 20.000 to close the loan in full. Ivan values the property at EUR 50.000 and wants to sell it to Marko. Marko is the buyer of the mortgaged property, which costs EUR 50.000 and carries a mortgage due to a debt of EUR 20.000.

Ivan and Marko agreed on the following: the buyer, Marko, will pay the bank EUR 20.000 towards the debt for which the mortgage exists. Marko will then pay the remaining EUR 30.000 into seller Ivan's account, because the price of the property is EUR 50.000. Once the bank receives the amount of EUR 20.000, it will close the loan obligations and issue a deletion statement for the mortgage lien on the property that was the subject of this transaction.

Although this is a standard and common procedure, it is still a serious legal transaction, and it is best to engage an expert to handle it, so we are at your disposal!

Third option: the seller transfers the mortgage from the property being sold to another property. In this case, the first thing the seller must do is contact the bank where they took out the loan. The bank must give its consent for the mortgage to be transferred to another property. If the bank grants this permission, the seller must expect costs for processing the documentation and for having the contract notarised again (solemnisation). The seller must also ask the bank to have the mortgage deleted from the title deed (ownership section of the land registry) of the original property.

The mere fact that a property is encumbered by a mortgage does not mean that it is not a good property to buy.

Buying a mortgaged property – the buyer's perspective

In practice, we often see that buyers are reluctant to purchase a mortgaged property, even when a particular property suits them perfectly because of its location, appearance, living area and so on. The mere fact that a property is encumbered with a mortgage does not mean it is not a good purchase. What matters is to become thoroughly familiar with the actual condition of the property and with the process that precedes the completion of this legal transaction. It is crucial that the seller does not hide from the buyer the fact that the property being sold is mortgaged, because the buyer will find out about the mortgage sooner or later. Suspecting that the seller is trying to deceive them, they will then withdraw from the purchase. In addition, selling a mortgaged property can also cause feelings of fear and discomfort in the seller, because the desired outcome is not in sight. Some buyers will walk away immediately because they are not ready to cope with the length of time or the complexity of the procedure. And that is fine. You have to accept that such people exist. It is nothing personal. Some buyers will change their minds at some point in the process, after seeming interested in buying and unconcerned by the mortgage burden on your property. And there will be those, and for you only one is enough, who will endure the procedure, the paperwork and the time needed to complete this transaction, because they have fallen in love with your little house: the yard is perfect, the view is beautiful, the lawn is huge, the orchard is bountiful, and so on.

It is very important that you, as the seller, act in good faith, that you are not discouraged by previous unsuccessful attempts, and that you keep your initial enthusiasm, because the right buyer will surely come.

Good preparation is essential for both parties. Get to know the situation. Gather information about the procedures ahead of you. Act in good faith and with the best intentions towards everyone you are in contact with, and a solution will inevitably come. Professionals with knowledge and experience in such transactions, such as real estate agencies, law firms and notaries public, can certainly help each party protect their rights and interests in the best possible way. How can a lawyer help when selling a mortgaged property? The fear caused by lack of knowledge, the uncertainty you feel because of the unpredictable timeline, and unfamiliarity with the specific processes of a property sale are all justified feelings, and they can be managed if you have a responsible and expert professional at your side whose only task is to protect your rights and interests. A law firm is made up of many individuals with knowledge of various branches of law. Their goal is to make the whole complicated procedure simpler for you. People often rely on contract templates found online, hoping to save money. Selling a mortgaged property is a serious matter, and one that can have long-term consequences for the assets of both the seller and the buyer. A lawyer has all the necessary knowledge of the legal processes and contracts applicable in the Republic of Croatia. A lawyer's task is to act in the best interest of the client who has engaged them, while, of course, respecting the legal order of the country in which we live. As the seller of a mortgaged property, before choosing the law firm that will represent you, arrange a meeting with the person who will be in charge of the entire process. The law firm, the real estate agency and all other legal entities whose involvement is necessary in this process are your team, with whom you will be working over the next few months. Keep in mind that communication between all parties must be transparent and efficient. Staff must be professional and well versed in the subject matter, the law and the processes. All procedures, requirements, forms and documents must be completely clear to you. This means that you are informed promptly of the status of your case at all times. So, when it comes to the preliminary steps in selling a mortgaged property, make sure you are represented by professionals, for the simple reason that the future should not give you more headaches than the present.