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You’d like to sell your home, getting ready to move on. But you took out a mortgage to buy it, which you’re nowhere near paying off. And you worry: Will that get in the way of the sale, if there’s still a sizable amount of the loan left?
True, a mortgage is technically an encumbrance on your home, which means that someone else (namely, your lender) has a claim on the property. Unlike other liens, however, it’s usually not considered a cloud on the title — because it’s so common, and because it’s easily settled.
“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.”
In short, yes, you can sell a home even if you still owe money on the mortgage. In fact, it’s pretty usual for people who are carrying mortgage debt to do so. But you must settle the outstanding balance when you complete the sale; it’s often part of the round of exchanged checks 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 home with a mortgage?
Equity is the key to selling a property with 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 you sign the final purchase agreement, finalizing the home sale.
This 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 can grow your home equity by paying down your loan balance or realizing an increase in your home’s value, either by natural market shifts or by implementing upgrades that boost its value.
If you can afford to, a great way to increase your equity is to make a 13th mortgage payment every year and specify that it should be applied to principal. This pays down your mortgage faster by reducing the interest paid on the outstanding balance.
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 the usual 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 deny offers to your home. 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 and, if you’re young enough, you’ll have the time to build them up again.
- Put your sale on hold. If you can avoid selling your home for the time being, you may want to consider waiting. Over time, the real estate market could turn around again 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.
1. Contact your lender for a payoff statement
The first thing to do if you’re thinking about selling your home while having a mortgage on it is 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, though, by hiring a professional appraiser (a real estate agent can help arrange this for you). Not only will a pro appraisal and help set a price, it will also make you an educated seller, acting as an important negotiating tool.
Regarding how much you’ll make on the sale, 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: You’ll likely work with a real estate agent, who will need to get paid (be sure to negotiate commissions and services before you list, not after) and a real estate attorney. And there may be other closing costs to pay as well, so some of the proceeds will go toward that.
In general, expect to pay between 7 percent and 10 percent of your home’s value in fees. Make sure that your actual net proceeds are sufficient to pay off both your mortgage and the fees. You should get a settlement statement before your closing that outlines all these costs.
3. Find a good agent and set a fair listing price
If you feel good about the value of your home and that the net proceeds 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 or Realtor can help you understand the local market and set a fair listing price for your home. They may advise staging the home to help generate more interest, and they can 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 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 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.
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 — it may take a few months.)
Only if you’re deeply 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 appraisal value (or their lender will balk at loaning them a sufficient sum). That puts you, the seller, in between the proverbial rock and the hard place.
The 6-month rule prevents you from refinancing a home until you have held title for at least six months. This is to stop people from buying a home and then immediately trying to take cash out.
This penalty is a fee that some lenders assess for buyers who pay off their mortgage early. The good news is that federal law changed the way banks are allowed to assess this type of fee back in 2014. Now, banks can only apply the fee to conventional loans, and only if you pay off your mortgage within the first three years of the loan. For the first two years you could be charged up to 2 percent of the remaining balance and in the third year you could pay up to 1 percent of the balance. All lenders that have loans with prepayment penalties must offer a penalty-free mortgage option.
Final word on selling a home with a mortgage
Selling a home that has a mortgage on it is very common. In fact, it’s likely that most real estate transactions involve homes for which the seller still has a mortgage. Make sure you know your home’s payoff amount and your expected proceeds from the sale, after commissions and closing costs. That will give you the clearest picture of how much money you’ll make on the sale when all is said and done.