Is it legal in the state of Illinois to sell a house contract for deed while still owing a mortgage?

Yes, as long as you keep up payments on the mortgage.

It is if not prohibited by the terms of the mortgage.

The person buying it on contract should have his attorney review the mortgage to be sure it is not against the terms.

Also the contract should be clear as to taxes and insurance.

The contract if I was the buyer should be filed at the court house, so it is a record of it, for any future loan attempts or changes.

The issue for the buyer is what happens if the owner does not pay the mortgage,