A Guide To Selling A House With A Mortgage
Kevin Graham7-Minute Read
March 22, 2021
There are lots of reasons to sell a home including a need for more space, a desire to downsize or a job relocation. However, what happens when you still have a mortgage on the home that needs to be paid off?
We’ll touch on the things you need to think about and the steps that go into selling a house with a mortgage before closing with a discussion of selling your home if you owe more than it’s worth.
Can You Sell A Home With A Mortgage?
The short answer is yes. You can sell your home even if it has a balance on the existing mortgage. In fact, this is commonplace. Outside of refinances, this is probably the second most common way to pay off a mortgage because more people have a mortgage than own their property free and clear. Most people don’t stay in their mortgages long enough to pay all the way through to the end of the loan.
When you sell your home, you can use your equity to pay off the loan balance and your share of any closing costs associated with the transaction. It’s important to know that prepayment penalties may apply depending on the terms of your existing mortgage and how soon you’re selling the home. Our friends at Rocket Mortgage® don’t charge prepayment penalties, but if you have any doubt, check with your lender.
How To Prepare To Sell A Home With A Mortgage
If you’re looking to sell a home with the mortgage still on it, it’ll be important to take the following steps to make sure you’re prepared. One of the things you’ll want to do when you know you’re getting ready to put the house on the market is consult your lender. They’ll be able to give you a key piece of paperwork that we’ll talk about next.
Get A Payoff Quote
A mortgage’s payoff amount represents the dollar figure that must be paid in order to have no further obligations under the home loan. To get it, you contact your lender prior to your home sale. Rocket Mortgage® clients can get a payoff quote by phone.
Your payoff quote includes several key pieces of information, including the total amount you owe and a breakdown of any fees being charged. The quote will also list the date on which it expires. This is important because if it expires, you’ll have to get a new one.
In addition to your outstanding mortgage balance, the payoff quote will list the interest that’s due between the date the payoff quote is generated and the expiration of the payoff date. If you still have mortgage insurance associated with the loan, you’ll need to pay that off as well. You’ll also need to rectify any escrow shortage that may exist.
Together with fees, this is the reason that your payoff quote doesn’t match up with your mortgage balance.
Getting your payoff quote before you sell is essential before you move forward with listing your home because you’ll know exactly how much you owe. If you have any doubt, you should also confirm the expiration of your payoff quote with your lender, although it should be clearly listed on the quote itself.
Determine Your Home Equity
Home equity is the difference between the market value of your home and the outstanding mortgage balance you have left on your home along with other liens you may have. Knowing the amount of home equity you have is one of the most important things you can be sure of going into the home selling process. You can use home equity to help pay off the outstanding balance in the sale along with closing costs.
There are really two different ways you can gain equity. Let’s get into these now before moving forward.
- Earned equity: Earned equity is gained from making your mortgage payment every month. With every mortgage payment, you pay off a little bit more of your principal. Early in the life of the loan, more of the payment goes toward interest, but that balance flips later on and more sizable amounts are put toward the principal, directly bringing down the balance.
- Home investment equity: This type of equity rises and falls with the value of your home. It’s all based on market conditions and the perception of your home relative to that of comparable properties around you. Because market value plays a role, you may have more or less equity than you would if it were based on your mortgage payment alone.
Your total home equity is the sum of your earned equity and your home investment equity.
Steps To Selling A Home With A Mortgage
In a typical home sale, the proceeds are used to pay off the mortgage and any other existing liens you have in addition to closing costs you owe on the transaction. It’s important to know that this process relies on the home being worth more than what you have left to pay off. We’ll cover what happens if that’s not the case a little later on.
1. The Sale Price Repays The Mortgage
If you have a mortgage on your home, it occupies what’s referred to as first or primary lien position. This means that in the event of a sale, the mortgage is the first thing that’s paid off. The funds for the mortgage payoff go directly to the mortgage lender.
2. Additional Loans And Liens Are Paid Off
After the mortgage is paid, any other loans and liens that are on the house get paid off out of the proceeds of the sale. These include other lending products like home equity loans (also known as second mortgages) and home equity lines of credit (HELOCs).
Also paid off at this point are any other liens on the property (for example, from work that may have been done and not fully paid off). Tax liens are also paid off in sales.
3. Cover Transaction And Closing Costs
After all liens are paid off, the last items taken out of the sale proceeds are transaction fees and closing costs. There are things like deed recording fees that are sometimes picked up by the seller. The most common seller-paid fee is the commission for the real estate agents involved in the transaction.
The other fees sellers sometimes pay for is the owner’s title policy that covers the new buyer in the event someone comes along with a claim to the property in the future.
Although these are the most common, everything is negotiable and being flexible on seller concessions sometimes allows a quicker sale or a higher price. Here’s a list of some of the fees included in closing costs.
4. The Seller Keeps The Remaining Funds
Once everything is paid off, the rest represents the seller's profit and can go directly in your pocket. If you're buying your next home, this leftover amount is typically put toward a down payment. If you have another living situation, you can use the money toward other expenses or financial and lifestyle goals.
How To Sell A Home With Negative Equity
Having negative equity is a situation in which you owe more on your home than it’s worth. This is sometimes referred to as being underwater on your home.
As a quick example, let’s say you owe $250,000 on your home, but a down market has meant that the home is only worth $220,000 from a market value standpoint. You have negative equity at that point. A sale at market value wouldn’t cover what you owe.
If you’ve got a home that’s underwater and you need to sell the house, one of your only options may be a short sale. Let’s run through that and how it works.
How Short Sales Work
Short sales are a process in which you sell a home for less than you owe on the mortgage. A lender has to approve a short sale because they’re not being made whole on the loan. They’re likely only to do this if you’re in imminent danger of default. You have to be facing some sort of financial hardship.
A short sale should be considered a measure of last resort. It’ll hurt your credit just as much as a foreclosure or deed in lieu (literally signing the property over to the lender). The advantage here is that you’re in control of the process rather than having your house foreclosed on. If you have a short sale, it can cause a ton of trouble if you’re trying to get a mortgage in the future.
If you’re applying for an FHA loan, you can get a mortgage after having completed a short sale without a waiting period as long as the following applies:
- You can’t have a mortgage or installment payment that’s 30 or more days late in the year leading up to the short sale.
- No mortgage or installment payments can be 30 or more days late in the year prior to your new mortgage application.
If you can’t meet these requirements, the waiting period is 3 years. Meanwhile, VA loans require a 2-year gap between the short sale and the purchase of a new property. You can’t get a conventional loan from Fannie Mae or Freddie Mac until you’ve waited at least 4 years. Finally, a Jumbo Smart loan from Rocket Mortgage® has at least a 7-year waiting period.
Beyond the concerns about future mortgage prospects, you’ll also have to rebuild your credit score somewhat after a short sale. The higher your score was going into the short sale, the more likely it is to drop further.
Although it’s certainly not a great thing for sellers, short sales can attract a motivated buyer because they may be able to get a slight deal. However, it’s still to the buyer’s advantage to offer as close to market value as possible because the bank will be trying to recoup what they can.
The Bottom Line
Selling a house with the mortgage still on it is the most common way to do it. The proceeds from the sale cover what you owe as well as transaction costs.
The first key is to know what you owe, and you’ll work with your lender to get a payoff quote. After that, you’ll want to see that you have enough home equity that you’ll be able to use the proceeds from the sale to cover your costs.
When it comes time to sell your property, the proceeds from the sale first pay off the mortgage followed by any additional loans and liens that are tied to the house. Finally, it’ll cover your portion of any closing costs associated with the transaction. Anything over and above that is your profit, which you could keep or use on a new home.
If you owe more on your home than it’s worth, one option to get out of the home would be a short sale. However, this should be considered a measure of last resort because there are waiting periods until you can get a mortgage again. Additionally, there are serious negative impacts on your credit score.
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