Selling a house with a mortgage

You’d like to sell your home and move on to the next phase of your life, but your mortgage on the house is nowhere near paid off. Is that OK? Or will the amount you owe on the loan make it difficult to sell?

The short answer is, yes, it’s OK — in fact, it’s common. “Most people who sell their homes have outstanding mortgages,” says Melissa Cohn, regional vice president of William Raveis Mortgage in New York City and Florida. “Having a mortgage does not get in the way of the sale of a home, as long as there is enough equity to pay it off in full when they close.”

While a mortgage is technically an encumbrance on your home, which means that someone else (namely, your lender) has a claim on the property, it’s usually not considered a cloud on the title. It’s an issue that’s easily resolved: You settle the outstanding balance when you complete the sale; it’s often part of the round of exchanged funds that occurs during the closing. This expectation that you’ll use the sale proceeds to repay the debt is the reason the lender is letting the sale go forward.

Can you sell a house before paying it off?

You can. Equity is the key to selling a property that still has a mortgage on it: Basically, your home equity is equal to the value of your home minus the outstanding mortgage balance. For example, if your home is worth $250,000 and you owe $100,000 on the mortgage, you have $150,000 in equity. This is the amount of cash, minus your closing costs and expenses, that you will receive when your sale is final (assuming you sell for the full value of $250,000).

Positive home equity is necessary for you to be able to pay off the loan using the proceeds from the sale. As long as you sell your home for more than the outstanding balance on the mortgage, you will be able to pay off your mortgage. You grow your equity by paying down your loan balance, but it can also be achieved with an increase in your home’s value, either by natural market shifts or by implementing upgrades that boost its value.

Keep in mind that you’ll have to pay closing costs when you sell, which can include Realtor commissions and more. So if your equity is just barely positive, it might not be enough. If you don’t have enough equity in your home to repay the mortgage with the proceeds from the sale, you’ll have to use other funds — such as savings — to make up the difference.

Selling a home that’s underwater

The one instance where you may have trouble selling a home with a mortgage is when you have negative equity. Colloquially known as being underwater or upside down, it basically means that the home is worth less than the amount you owe on it.

Imagine you buy a home for $300,000, putting down 20 percent and borrowing $240,000. Alas, the local real estate market tanks, and you find you can only sell the home for $215,000. If you still owe $225,000 to your lender, you won’t be able to sell your home at a price tag that allows you to pay back what you still owe. You’re underwater.

You have a few options in this situation:

• Offer a short sale: You need the permission of your lender to sell the property for less than your current mortgage balance; the bank must agree to take a loss. If you get approved, your bank will have a say over whether to accept or reject offers. This type of sale will negatively affect your credit score, but will allow you to walk away without having to pay the entire balance on your loan.
• Pay out of pocket:You could make up the difference out of your own savings or by selling investments. In the above scenario, this means coming up with $10,000 to pay back the remainder of the loan. Dipping into assets isn’t ideal, but this option will preserve your good credit.
• Put your sale on hold:If you can put off selling your home for the time being, you may want to consider waiting. Over time, the real estate market could change and you may find yourself in a better position to sell for a profit — or at least break even.

Steps to sell a home with a mortgage

In general, you must pay off any mortgage or loans secured on a home when you sell the property. You can list the property for sale and go through most of the process while still owing a balance, but you must pay the loan off as part of the closure of the sale. Here are four steps to follow when selling a house with a mortgage.

1. Contact your lender for a payoff statement

The first thing to do if you’re thinking about selling a home that still has an outstanding mortgage is to contact your lender and ask for a payoff statement or letter. This document tells you how much you’ll need to pay the lender when you sell. The payoff amount will change every month, even on a fixed-rate mortgage, since you’re making monthly payments. So be prepared to get a second statement when your closing date is set.

A payoff statement has instructions for how you can submit a final payment to repay a loan in full. It will give you a specific amount to pay, which includes any accrued interest and other charges, as well as the due date for the payment. It may also include penalties for prior late payments and an early payment penalty.

2. Estimate home value and net proceeds

Once you know how much you’ll need to pay off, it’s time to start estimating the value of your home and how much you can expect to receive from selling it.

There are many ways to estimate how much your home is worth, but a good place to start is to look for comparable homes, or comps, in your area that have sold recently or are on the market now. That can provide helpful context.

You can also try typing your address into an AVM, or automated valuation model. These online tools can also help you get an estimate of your home’s worth, though they are not guaranteed to be accurate. You’ll get the most accurate valuation by hiring a professional home appraiser.

Keep in mind that if you owe $150,000 on your mortgage and you sell your home for $300,000, that remaining $150,000 isn’t all pure profit. Selling a house costs money: There are closing costs to pay, and real estate agents’ commissions, and possibly attorney fees as well. Some of the proceeds will go toward that. Make sure that your actual net proceeds are sufficient to pay off both your mortgage and the fees and closing costs. You should get a settlement statement before your closing that outlines all these expenses.

3. Find an agent and set a fair listing price

If you feel that the net proceeds you earn can cover the remaining balance of your mortgage and fees, start looking for a real estate agent. Finding a good agent who you like is essential, because you’ll be working with them throughout the sale process.

A savvy real estate agent can help you understand the local market, set a fair listing price for your home and generate buyer interest. They can also help you analyze any offers that you receive to make sure you’re getting the best deal possible.

Your agent should also prepare a seller’s net sheet for you — a kind of itemized work or balance sheet, detailing estimated costs and giving a sense of how much you stand to gain once a deal goes through. Ideally, your agent will send you an updated seller’s net sheet with every offer you receive so you can make an apples-to-apples comparison between the bids and see which will net you the most money.

4. Sell the home and pay off the mortgage

Once you receive a good offer and accept — congratulations! — it’s time to sign the purchase and sale agreement, which begins the closing process. You’ll likely have to wait for things like the buyer’s appraisal and inspections to be completed before you’re ready for closing day.

When you close on the sale, you’ll use the proceeds to pay off your mortgage lender and any outstanding fees or closing costs. A representative of the lender will be at the closing to collect the money due to them. Whatever is left over after that is your profit — that’s the money you get to keep, aka the net proceeds. For example, if you sell for $300,000 and owe $150,000 to pay off the mortgage, plus $20,000 in closing costs, your profit is $130,000.

What happens when you sell your house for a profit?

Ideally, your home will have appreciated in value while you owned it and will sell for more than you paid for it. Selling for a profit is good, of course, but depending on just how much you make, you might owe capital gains taxes on the proceeds.

Typically, to trigger capital gains taxes in real estate, the home would have to have been your primary residence, and you would have to have made a significant amount — hundreds of thousands of dollars — on the sale. If you sell a primary residence, you can exclude the first $250,000 in profit, or the first $500,000 if you’re married and file taxes jointly.

FAQs

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  What happens to your mortgage when you sell?

  When you sell your home, you pay off your mortgage balance on the home in full. That means you’ll be done with that debt. Depending on the terms of the mortgage, you might be charged a prepayment penalty or early repayment fee. This fee is charged when you pay the loan off ahead of the preset schedule. In addition, many mortgages involve an escrow account. If any money related to your mortgage was being held in escrow, the balance of that account will be refunded to you. (Escrow funds won’t be turned over at the closing table, though — it may take a few months.)
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  Can a mortgage stop you from selling a home?

  Only if you’re underwater. If you owe more on your mortgage than the current value of your home, your mortgage could make it impossible to do a traditional sale. Your lender might refuse to let you sell the home for less than the outstanding balance, and buyers might balk at a price so much higher than the home’s appraised value (or their lender will balk at loaning them a sufficient sum). If your home is worth more than you owe on the mortgage, you are not likely to have a problem.