You can sell a home with a mortgage. In fact, it’s extremely common for homeowners to sell their home before they’ve completely paid off their loan. Whether you’re thinking of selling your home to relocate or looking to trade your old home for an upgrade, you’ll need to know the ins and outs of selling your home before your mortgage is paid off.
Let’s take a look at the need-to-knows for selling a house with a mortgage and the steps you’ll need to take in order to do so.
Are You Able To Sell Your House With A Mortgage?
Yes, you can sell your house with an existing mortgage. Selling with a mortgage is actually very common since the average homeowner stays in their home for about 13 years. That means it’s completely normal to pay off your mortgage by selling your home.
Knowing how to sell a house with a mortgage is important. Most importantly, you’ll need to sell your home for more than you owe on your mortgage. Selling your home for more than you paid is crucial so you can pay off your mortgage and keep the remaining proceeds. Or, if you’re looking for a new home, you can use the profits for a down payment on your next home.
If you don’t sell your home for at least as much as you owe on the mortgage, you would owe the difference out of pocket. It’s best to know how much your home is worth and compare it to your current mortgage to make sure you have enough equity in your home to sell your home for a profit.
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How To Sell A House With A Mortgage
Before you can sell a house with a mortgage, there are certain requirements you must meet. First, your mortgage is a legal obligation, so you must satisfy it if you sell the house. In other words, you can’t sell the house and not pay off the mortgage. You must clear up any liens on the property before you sell.
If you’re selling a home with a mortgage, there are specific steps you must take in a specific order to ensure you satisfy your legal obligations.
Let’s take a closer look at the steps and the order you’ll need to take them in.
1. Get A Payoff Quote
The first step to selling a house with a mortgage is to get a payoff quote. This will tell you how much you must pay your lender to satisfy your mortgage agreement and release the lien.
If you’re moving to a new mortgage lender, they’ll likely request the payoff quote for you. However, you can contact your current loan servicer and ask for a payoff quote if they don’t. Some lenders even have automated phone or online systems that make getting a quote even easier.
Your payoff quote will include not only your mortgage balance, but also any applicable fees or mortgage insurance balances, and the date when the quote expires. If you aren’t sure of your closing date, make sure to add a few buffer days into your request. This will help avoid any per diem interest charges if you go past the deadline for your payoff quote so you don’t underpay.
2. Determine Home Equity
You’ll want to know how much home equity you have. It could help you when you buy your next home or otherwise invest the money from your home sale. Some homeowners invest the entire amount of their current home equity in their new home. Others invest some of the profit but keep the rest liquid.
What you do depends on what mortgage you qualify for and how much money you have saved for your down payment.
Home Investment Equity
Home investment equity is the equity you’ve gained in the home caused by an increase in the market value. For example, say you bought your home for $150,000, and now it’s worth $250,000. So, you earned $100,000 in equity in the home just by the house appreciating. You didn’t necessarily have to do anything to earn this equity.
Earned Equity
Earned equity is the equity you invest in the home yourself like the money you pay upfront for your down payment. So, for example, if you put 20% down on a $150,000 home, you have $30,000 in instant equity.
You also increase your equity each month as you make principal payments toward the loan. That means every time you make your monthly mortgage payments, you’re actually increasing your home equity. This lowers how much you owe and increases the difference between the home’s value and your mortgage balance.
Paying any windfalls or large amounts of money you earn toward your mortgage also increases your earned equity. Every dollar you pay toward the home’s principal increases your equity.
3. Market And Sell Your Home
Once you know what you owe, it’s time to put your house on the market. You’ll need to price your home to make sure your asking price can cover your loan balance. A REALTORⓇ or real estate agent will know the local market and can help you price your home competitively.
They can help you set an asking price and ensure you get the best offers on your home. Hopefully, this will help you repay your mortgage balance and fees – and also make a profit.
4. Repay Your Mortgage Lender
Once you know how much you owe and your home sale has gone through, you’ll need to pay off your mortgage lender. Your primary mortgage lender has the first lien position on your home and therefore gets paid first. Make sure you have an accurate payoff quote and follow up to satisfy the debt.
If there are remaining days of unpaid interest, make sure you pay them as quickly as possible to pay your loan off in full.
5. Pay Off Additional Loans, Second Mortgages And Liens
If your home has any other liens, you must also pay them off. Liens stay with the home, not the person. This means if you didn’t clear any outstanding liens on the property, the buyer might not be able to close on the home. In addition, mortgage lenders require a clear title which isn’t possible with outstanding liens.
Common loans and liens you might have on your property include:
- Second mortgages
- Home equity lines of credit (HELOC)
- Tax liens
- Mechanic’s liens
Keep in mind that loans like home equity loans and HELOCs are considered second mortgages. Any loan that is secured by your home adds a lien to your property that will need to be paid when you sell your house.
You’ll want to make sure to ask for documentation once each loan or lien is paid in case you need to provide proof of payment in the future.
6. Cover Fees And Closing Costs
You’ll likely have transaction fees and closing costs if you sell a house with a mortgage or without one. While you won’t pay as many closing costs as the buyer, you can expect to cover expenses including real estate agent’s commission, title policy fee, and, in some cases, prorated property taxes. The funds can come directly from the proceeds of the sale if you’re receiving enough to cover your mortgage amount, liens and closing costs.
7. Keep Remaining Funds
Once you pay off all liens on the home, including the first mortgage, any second mortgages or HELOCs, and any other outstanding liens, the remaining funds go to you, the seller. If you choose to reinvest the funds in your next home, it’s a great way to start homeownership with equity by making a large down payment. Making a down payment of 20% or more can help you avoid private mortgage insurance (PMI) and build home equity.
After all your transactions are completed, you’ll receive either a wire or check for the remaining amount. Once the money is yours you can use it any way you like, as an emergency fund, renovating your new home or even saving towards retirement.
Can You Sell A House With Negative Equity?
Yes, it is possible to sell a house with negative equity, but you’ll need to pay the total balance of your mortgage once the sale is complete. If you have negative equity – sometimes called being “underwater” or “upside down” on your home – it means your house is worth less than the total outstanding amount of your mortgage.
Selling with negative equity is often a measure of last resort for people who are experiencing financial hardship. It can involve taking a financial loss and can negatively impact your credit.
Let’s take a look at some of your options if you end up in a home with negative equity:
- Wait for home values to rise: If you don’t need to move right now and you aren’t experiencing financial hardship, staying put can be your best option. Even if you have negative equity now, as the market shifts the value of your home may increase so you can break even or profit when you do sell.
- Talk to your lender: If you’re considering selling to avoid defaulting on your mortgage, there may be other ways your mortgage company can help. Depending on the situation, there is a possibility that your lender may be sympathetic and could offer a loan modification, forbearance or another arrangement to allow you to avoid foreclosure.
- Sell the home in a short sale: A short sale is when you sell your home for less than the amount you owe on it, but the proceeds go directly to your mortgage lender. Often, this is in exchange for forgiveness of your remaining mortgage balance. In some states, it can include a deficiency judgment for the remaining loan balance. Since short sales can hurt your ability to buy a new home and your credit, they’re often a last course of action.
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Selling With A Mortgage: FAQs
Let’s take a look at some common questions that might come up when selling a home with a mortgage:
What is a mortgage prepayment penalty?
A mortgage prepayment penalty is a fee charged by some mortgage lenders for buyers who pay back some or all of their mortgage early. Usually, prepayment penalties only apply if you are paying off your mortgage within the first 3 to 5 years on your loan.
How soon can you sell a house after buying it?
Technically, there are no legal limitations to how soon you can sell your home after buying it. However, a good rule of thumb is to wait 5 years. This is to allow you time to recoup your closing costs, gain certain tax benefits and avoid any prepayment penalties.
What happens if I sell a house with a mortgage?
The process of selling a house before paying off the loan is similar to selling a home without a mortgage. However, there will be a few extra requirements. Part of the proceeds will be paid to your mortgage company to pay off your balance and you may need to sign some extra paperwork at closing.
The Bottom Line
If you are wondering, “Can I sell a house with a mortgage?” – the answer is yes. However, before you commit to selling, you should talk to your real estate agent to determine the home’s value so you know how much money you have available to make your next real estate investment.
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Miranda Crace
Miranda Crace is a Staff Writer for Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University, where she studied PR writing, film production and film editing. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.
