DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.
You’d like to sell your current home, but the mortgage isn’t paid off yet.
Can you sell a house you still owe money on?
Actually, it happens all the time. Most mortgages come with 15 or 30 year terms, while the average time people stayed in their homes recently decreased to eight years, down from 10 years in 2020, according to data from the National Association of Realtors.
“Most of my sellers have a mortgage,” echoes Rebecca Carter, a top real estate agent in Knoxville, Tennessee.
So thankfully, you are not stuck in a home until you pay off every last dollar. Here are the quick points to know on how to sell a house with a mortgage:
- You’ll use the proceeds from the sale of your home to pay off your existing mortgage balance. Your lender will receive their payout at the time of closing.
- After satisfying the mortgage debt and covering the fees associated with selling a house such as commissions and taxes, you will (hopefully!) have some profits to take home.
- If the amount received from the sale falls short of your outstanding mortgage balance and selling costs, you will have to cover the difference with funds other than those from the sale.
- In today’s market where property values have seen steep increases, it isn’t common for sellers to owe more than their home is worth, a situation that’s known as being “underwater.”
- A mortgage is more likely to become underwater if a seller falls behind on mortgage payments, sells before they’ve gained much equity, or sells during a market downturn.
If you’re ready to sell your home, follow these steps to account for your existing mortgage in the process.
1. Check your home value
Start by getting an idea of how much your home is worth. For a ballpark figure, you can use a free online home value estimator.
Our Home Value Estimator pairs housing market data from multiple trusted sources with details about your house that you personally share.
Input your address, answer the short questionnaire, and we’ll provide you with a near-instant estimate.
Keep in mind that our estimate tool is not a guarantee of what your home will sell for. On the open market, a buyer may be willing to pay more or less than what your estimate shows.
Your real estate agent will give you a more precise number using a comparative market analysis (CMA) that analyzes the value of your home based on comparable sales, a tool that you will use to price your home when the day comes.
An agent will be able to pull comparable sales from their local MLS, giving them greater insights into the area. An agent will also likely request to do a walkthrough of your home to inform their assessment.
2. Contact your lender
Next, you want to find out how much you still owe on your mortgage. Your lender is required to provide the total amount required to satisfy the mortgage debt as of a specified date, according to the Consumer Financial Protection Bureau, a figure known as the payoff amount.
“It’s always going to be a good first check to call the bank and ask for a payoff statement,” shares Richie Helali, Mortgage Sales Leader at HomeLight. “It will help you estimate how much equity you’re going to receive if you do sell it for a particular number.”
The payoff amount includes any interest you owe until the day you plan to pay your loan in full. Once you close on your house, your escrow company will coordinate with your lender to get an updated payout amount and use your home sale funds to pay off the debt in its entirety.
“Most people put their mortgage on auto-pay, so they don’t always take a look at their statement every month,” Helali adds. “One of the first questions I ask clients who want to sell and buy a new house is, ‘How much do you owe?’ and they might say $200,000. Once they get a payoff statement, it might be $210,000-$220,000, which affects things like their budget for a new home significantly.”
3. Estimate your net proceeds
Now that you’ve collected a home value estimate and your mortgage payoff amount, use this simple home sale proceeds formula to estimate how much you’ll walk away with:
|Credit/debit for the sale||Example calculation|
|Market value of your home||$400,000|
|(-) Mortgage payoff amount||$100,000|
|(-) agent commission (5.8% average)||$23,200|
|(-) approximate closing costs (1%-3%)||$6,000|
|= estimated home sale proceeds||$270,800|
HomeLight also offers a handy Net Proceeds Calculator to help you better estimate the cost of selling your home and the net proceeds you could earn from the sale. In addition, your agent may prepare what’s called a net sheet for you, which can help you account for any local fees and costs specific to your area.
You won’t know the exact breakdown of credits and fees for the sale until you receive your estimated settlement statement at closing, but a ballpark calculation upfront can help you get a clearer vision of whether now is the right time to sell from a financial perspective.
Many sellers underestimate what it costs to sell a home — which totals an average $31,000 not including the mortgage payoff, according to an analysis by HomeLight.
If the estimated margin between your home value and selling costs is slimmer than you realized, you can determine whether to move forward or wait a few years to build up more equity before selling.
4. Find a great real estate agent
If you haven’t done so already, now would be a great time to find a top-rated real estate agent who can help you through the steps of selling a house with a mortgage.
Today one of the easiest and most effective ways to find an agent is through an online agent-matching service. A matching service goes a step beyond providing a master list of agents for your area and will provide you with a list of qualified candidates tailored to your selling needs and location.
This process saves you time while leading to a more effective search of the best local agents you can meet with. The top 5% of real estate agents surfaced through the HomeLight platform, for example, are known to sell houses for as much as 10% more than the average real estate agent, according to our internal data.
To narrow your list of potential agents to top performers and get easy access to an agent’s ratings and reviews for free, request your agent matches through HomeLight and we’ll be happy to make some introductions.
5. Set a price for the home
With the help of your agent, determine an appropriate asking price for your home. The price should be in line with market expectations and reflect what a real buyer is likely willing to pay. Price too high and the home could sit stale on the market without any offers, leading you to accept a lower price than necessary.
You may already have a sense of what your home is worth, but your agent will provide a comparative market analysis (CMA) that packages together key pieces of information, including the sale price of other nearby homes and local market trends to offer a complete overview.
Look to the CMA for guidance in the pricing process; it will take into account your home’s unique features and condition, as well as factors like inventory levels and price patterns for the area.
6. Accept an offer and open escrow
Once you accept an offer from your buyer, you’ll complete any additional steps to close such as the home inspection and home appraisal. At this point, you may wonder if you need to get in touch and update your mortgage lender about your plans to sell and pay off your remaining mortgage balance. However, you can rest assured that your third-party escrow company will facilitate those communications.
“Technically, you don’t have to say anything to the bank when you’ve accepted an offer on your home,” confirms Helali. “You just continue making your payments and as you get closer to the closing date, the escrow or title company that’s going to be handling your transaction will reach out to your lender and get an official payoff statement based on an actual closing date. There isn’t much maintenance that you have to do.”
7. Review your settlement statement
One of the final steps of selling a home will be to review your settlement statement, which is an itemized list of fees and credits summarizing the finances of the entire transaction.
This is where you’ll be able to see:
- The sale price of the property
- Your exact mortgage payoff amount
- Additional closing costs being subtracted from the price
- Who’s getting paid, including agents collecting commission, local governments owed taxes and recording fees, and final charges going to the lender
- Net proceeds (which will likely be at the bottom labeled as total credits to the seller)
You won’t personally have to worry about making sure your lender gets paid. As Helali explains: “When the buyer of your home makes the purchase, the escrow company will receive all of the funds and they’ll write a check directly to your lender.”
Review our complete guide on how to read a settlement statement for further guidance on this step of the sale.
Top questions about selling with a mortgage
Now that we’ve reviewed the general process of selling a house with a mortgage, let’s clear up some common points of confusion while addressing unique circumstances that may cause your path to look a little different.
What if your house is underwater?
Selling a house with a mortgage is extremely common. And in most cases, to satisfy the loan obligation, you simply need to put your house on the market, find a buyer, and pay off your mortgage debt when the deal closes. In the fourth quarter of 2021, the number of mortgage properties with negative equity decreased 3% to represent a mere 2.1% of all mortgaged properties, according to property analytics company CoreLogic.
However, if you’re underwater on your mortgage, you’ll need to work out a different solution of some kind.
“Normally someone that’s underwater is not going to sell. But if they’re in a spot where they don’t have a choice — if they can afford to pay the difference and sell the property — some people will do that,” Helali shares.
“For most folks, that’s not an option,” he adds. “At that point, they’ll need to contact the lender to request a short sale, which is when you sell for less than what you owe.”
The lender will have to agree to the short sale and approve an offer before you can move forward with the transaction.
Our guide to selling a house that’s underwater goes over these options in further detail. As a first step, we’d always recommend reaching out and starting a conversation with your lender. Depending on the situation, it may be possible to work out an arrangement or modified payment plan.
Who is responsible for the mortgage during the sale?
A borrower is required to make on-time mortgage payments until the lender is paid the outstanding balance in full. So as you prepare and price the home for sale, navigate offers and negotiations, and wrap the steps to closing, you’ll continue to make mortgage payments in the same way you always have been.
How soon can you sell a house you just bought?
Technically you can sell your house at any time. A homeowner’s decision to sell abruptly often stems from an unplanned life change, such as a job relocation, a death in the family, a divorce, or an injury or medical condition.
That said, real estate isn’t a get-quick-rich scheme. Although there are some hot markets that might see quick appreciation, in most cases the value rises slowly over a period of years, making it advantageous to hold on to the home for a while before selling if possible.
Is it ever a bad idea to sell your home before it’s paid off?
The timing of when to sell a home is really a personal decision and dependent on your circumstances and financial goals. However, keep in mind that if the value of your home won’t cover your outstanding mortgage balance and selling expenses, you’ll need to bring separate funds to the sale to cover the difference.
Another thing to keep in mind: if you sell the home before owning it for a minimum of two years, you’ll likely have to pay capital gains tax if you make money from the sale.
- If you’re selling less than a year after buying, you’ll have to pay a short-term capital gains tax on your gain from the sale, which is taxed as ordinary income according to your tax bracket.
- If you’re selling more than a year after buying, but less than two years, your gain will be taxed at the lower long-term rate — either 0%, 15%, or 20%, based on your capital gains tax bracket.
If you’ve owned and lived in the home for two of the past five years — and haven’t excluded gain from the sale of a different main residence in the past two years — the IRS allows you to exclude up to $250,000 of gain if single or married and filing separately, or up to $500,000 if married and filing jointly. We always recommend reaching out to a tax advisor to go over the details of your individual transaction.
Can you have two mortgages at once?
Whether you can take on two mortgages at once will largely depend on a criteria lenders consider called your debt-to-income ratio (DTI). DTI is a measure of your gross monthly debt payment to your gross monthly income. Lenders typically like to see a DTI of 45% or lower.
So most likely you would need your combined mortgage payments plus all additional minimum debt payments (including student loans, car payments, and credit card debt) to equal no higher than 45% of what you’re bringing in every month in order to qualify for two mortgages.
“If you’re in a situation where you have to buy before selling, the bank is going to make sure that you qualify with both loans considered,” explains Helali. “But many folks spend 30%-40% of their income per month on housing payments so they typically won’t be able to qualify for two mortgages.”
If you do qualify for two mortgages from a financial standpoint, then it’s a matter of whether you feel comfortable juggling both payments and for how long.
How can I sell a home with a mortgage and buy a new one?
Unless you have a lot of cash on hand, it might be tough to come up with the money for a down payment while the equity is still tied up in your current home.
Your options here may be to:
- Make a contingent offer, which includes a condition that your contract is dependent on your current home selling (protects you from carrying two mortgages, but weakens your offer)
- Purchase the new home before your old home sells if you can qualify for two mortgages (the difficulty of this route is noted above)
- Seek an offer from a cash buyer to ensure the speedy sale of your existing residence, and put the proceeds toward the next home
- Look into a Home Trade-In program, which is similar to the process of trading in your car to the dealership
“Some companies have come up with a neat solution to get rid of your old home while you’re in the process of buying a new one,” shares Helali. “That’s one of the things that we do at HomeLight called the Trade-In program. We’ll buy your old house so that you can purchase a new one without having to worry about it.”
The way this goes is we make an offer on your current home, freeing up your funds so you can buy a new home. We then work with your agent to list your past home. If your home sells for more than the price HomeLight paid for it, we give you the additional cash minus selling costs and program fees*. HomeLight Trade-In is currently available in Arizona, California, Colorado, Florida, and Texas. Sign up here to be notified when HomeLight Trade-In launches in your area.
Can you make money on a house you still owe on?
Yes, you can absolutely make a profit on a house you still owe money on. When you sell a house with a mortgage, any profits leftover after you cover your outstanding mortgage balance and selling expenses are yours to keep.
Mortgages are pretty awesome financial tools that allow people without hundreds of thousands of dollars in cash reserves (aka, most of us!) to achieve their dream of homeownership. Some homeowners will stay in their homes long enough that the entire mortgage is paid off by the time they sell. That’s a great feeling! However, it’s not required that you stay in your home until that happens.
Typically, sellers use their proceeds to pay off their remaining mortgage balance and closing costs, then pocket the remaining funds. This option is possible because real estate generally gains value over time, so a house is usually going to be worth more when you sell it than when you purchased it. A report from CoreLogic shows that U.S. homeowners with mortgages saw their equity increase by an average $55,300 over the course of 2021 alone.
That’s the beauty of owning a home!
*The fee is dependent on your market, the lender you use, and the number of days we own your home.
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