Speaking with a mortgage lender—or several—before you buy a home shows that you’re a serious consumer, but talking with one of these experts before you sell a house has several benefits as well.
Here, we explore five areas you can cover with a mortgage lender before putting your home on the market that 1) protect your best interests as a seller and 2) give you a clear view of your current financial picture so you don’t live to regret the day you sold your house.
1. Get your loan payoff amount to find out how much you still owe on your mortgage
So before you pull the trigger on your home sale, you need to get a solid sense of your current financial picture and how much you stand to make from the deal after everything shakes out.
That starts with finding out what it will take to pay off your current mortgage. Your monthly mortgage payment has two main components: the principal (the amount you’ve borrowed) plus interest (the lender’s charge for lending you money), according to the Consumer Financial Protection Bureau (CFPB).
But the devil’s in the details: most mortgage payments also may include homeowners insurance, taxes held in an escrow account, and private mortgage insurance premiums, if required by your particular loan. Even with a fixed-rate mortgage, your total monthly payment can change.
So although you might keep good financial records, you should contact your current mortgage lender for your payoff amount, or the total you’ll have to pay to satisfy the terms of your mortgage loan, including any interest you owe until the day you plan to pay your loan in full.
To be clear: The payoff amount is not the same as the “current balance” listed on your most recent mortgage statement (the current balance may not include interest).
According to the CFPB, your lender is required to provide your payoff amount to you, so don’t be shy about asking for it. Once you close on the house, you’ll be in touch with your lender again for your exact take-home pay (accounting for any changes in the months that passed between pre-list and close) and use your home sale proceeds to pay off that debt.
Once you know your payoff amount, you can use this simple home sale proceeds formula to get a better idea of how much money you’ll make at closing.
2. Find out about any prepayment penalty fees on your current mortgage
Some lenders charge what’s known as “prepayment penalty fees” if you pay off your mortgage sooner than expected, such as within three to five years. Sometimes a prepayment penalty applies if you pay off a large amount of your mortgage at once.
The reasoning is that lending institutions count on the revenue they plan to make from the interest on your loan over time, so they’ll issue a penalty for early payoff to make up for it. Lenders also want to safeguard against the risk that borrowers refinance the loan shortly after a borrower closes on a home.
“The penalty is based on a percentage of the remaining mortgage balance or a certain number of months’ worth of interest,” according to Investopedia, a New York-based finance education and analysis site founded in 1999.
You typically can pay extra toward the principal in small chunks without incurring a penalty fee, but it’s always wise to check with your lender about whether your mortgage includes these fees.
Prepayment fees aren’t as common in today’s market of airtight mortgages, and lenders are required to disclose prepayment penalties to borrowers upfront. Nevertheless, it can be difficult to keep tabs on all the terms of your loan. Best to put in a phone call to your lender to make sure that you wouldn’t be penalized for selling your house at this point in time.
3. Obtain a line of credit to use for repairs before you sell
A home equity line of credit, or HELOC, is a revolving credit line that allows you to borrow against the available equity in your home, using your house as collateral.
That means the amount you owe on your mortgage must be less than your home’s value; typically, you can borrow up to 85% of your home’s value minus the amount you owe, according to Bank of America.
You can use this to pay for upgrades and repairs on your home at a lower interest rate than some other types of loans, provided you don’t plan to list the house right away.
You can repay a HELOC within 20 years, but a buyer’s mortgage lender will require all debts, including a HELOC, to be satisfied upon closing so that the home has a clear title.
4. Get preapproved for a loan to confirm selling now is the right choice
Before you sell your house, it’s a smart idea to find out if you’re qualified to buy another home that suits your needs for the future.
Otherwise, you could end up under contract with a buyer, only to realize that due to a change in financial circumstances or lower sales price than you anticipated, you’re now unable to qualify for another loan or obtain financing for the dream house you’d been eyeing.
Worst case, you could end up having to rent or purchase a place far below your imagined standards when you set out to sell.
So, prior to listing your house, work with a lender to get preapproved for your next loan to make sure you’re still in good financial standing.
Going through the preapproval process involves supplying the lender with your tax returns, W2s, and other verified financial information about your income. The preapproval letter you’ll receive will reflect the expected proceeds from the sale of your house but will be contingent upon you selling your home.
Now, to avoid the risk of juggling two mortgages and to put your best foot forward as a buyer, you still may want to sell your house before making any offers.
According to Anna Terry, a real estate agent with 24 years of experience who is the broker in charge of her office in Chapel Hill, North Carolina, you’ll save money over the long run if your home sale isn’t contingent on the purchase of a new home, even if you need to go into a temporary housing situation.
“You’re going to pay more for the house you’re buying if it’s contingent on the sale of your current home,” Terry said.
“It takes a good agent to explain to them the benefit of moving twice. That’s a hard thing for people to wrap their minds around. But they’re going to be a much more competitive buyer … (if) they have their equity in the bank.”
Nevertheless, the preapproval letter gives you the peace of mind that however things shake out, you won’t be surprised by any financial roadblocks to your next move, assuming nothing drastic changes with your finances over the course of your home sale.