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 go through the tedious steps to finance your dream home, and maybe even plan to stay for the long haul.
Then, life happens.
Your job relocates you, your family takes you across the country, or you just fall in love with another house in a new neighborhood. And putting your house on the market just makes the most sense. Sound familiar?
With mortgages ranging from 15 to 30 years, chances are your current loan isn’t fully paid off when it comes time to sell. So are you stuck where you are until you’re paid off every last dollar?
“Most of my sellers have a mortgage,” says Rebecca Carter, a top real estate agent and multimillion dollar producer in Knoxville, TN.
The key is to determine exactly how much you still owe to make sure the sale of your current home pays off the remainder of your mortgage, plus all of your selling costs. Otherwise, you could be facing a shaky financial situation where you owe more than your home is worth at closing — a position that no homeowner wants to be in.
Ideally, you’re taking home a check, and not opening up your wallet at the final signatures!
First, figure out how much you still owe on your current mortgage
When you sell a house with a mortgage, the first thing to do is find out roughly how much you still owe on the loan.
Thankfully, there’s an easy way to find out: Contact your lender or servicer and request your payoff amount. The payoff amount is 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.
The payoff amount is not the same as your current balance, which will appear on your most recent account statement and may not include interest.
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, so don’t be shy about asking.
Once you close on your house, you’ll be in touch with your lender again for an exact payout amount and use your home sale funds to pay off the debt in its entirety.
Next, crunch the numbers on your home sale net proceeds
Knowing how much you owe, it’s time to figure out how much you’ll be making from your home sale after all is said and done — and whether it will be enough to cover your outstanding mortgage balance, plus all the typical fees associated with selling.
To do that, you need to start by getting an idea of how much your home is worth. For the purposes of some rough math, you can start with a free online home value estimator to see how your home has changed in value since you purchased it.
What’s nice about our Home Value Estimator is that we’ll pair housing market data from multiple trusted sources with details about your house that you personally share. We figure since you live there, you may know about factors that would impact its value that the internet doesn’t.
Just input your address, answer the short questionnaire, and with that information in hand, we’ll be able to predict your current home value with far greater accuracy.
Our Estimate Tool is just a starting point, though. 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.
An agent will be able to pull comps from their local MLS, giving them greater insights into the area, and will also offer to do a walkthrough of your home to inform their assessment.
With your home value in hand, use this simple home sale proceeds formula to estimate how much you’ll walk away with:
- Start with: the approximate value of your home
- (Subtract) the agent commissions
- (Subtract) attorney fees
- (Subtract) property taxes
- (Subtract) title, escrow, notary, and transfer fees
- (Subtract) your mortgage payoff
- (Subtract) any other additional selling costs
- Equals: your home sale proceeds
To make things easier, HomeLight offers a handy Net Proceeds Calculator to help you better estimate the cost of selling our 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.
Property tax tip for your home sale proceeds: According to Ray Brousseau, the president of California-based Carrington Mortgage Services and an expert in residential mortgage lending, whether or not you’ll have to pay property taxes on your home sale depends on your municipality’s real estate tax schedule.
In some instances, cities and towns will collect taxes for the upcoming year, meaning that the sale of your home midway through the calendar could result in a refund. In other states, homeowners pay property taxes “in arrears,” meaning you’re paying taxes for the time period leading up to the billing cycle. That could leave you with unpaid property taxes, and you are responsible for paying property taxes on your home up to (but not including) the day you close.
If you’re behind on your mortgage payments…
As Carter points out, selling a house with a mortgage is extremely common. And in most cases, putting your house on the open market, finding a buyer, and satisfying your mortgage debt when the deal closes is all you’ll need to do to pay off that loan.
But in the event that your monthly mortgage payments have gotten away from you — or you find yourself approaching the risk of foreclosure — you might be worried that the conventional listing process can take two to three months from list to close. In addition, since contingent offers can fall through 1%-10% of the time, there’s a chance that even if you find a buyer, they could back out under an escape clause written into the contract.
If you can’t wait that long without getting into deeper financial trouble, then HomeLight’s Simple Sale platform could be something to explore using. Provide us with information on your home online and we’ll match you with the highest bidder from our network of pre-approved direct real estate buyers in 48 hours or less. You may be able to get money from the sale in your bank account within as few as 7 days, and you get to pick the move date.
Sell Your House With a Mortgage Quickly
Simple Sale buyers are ready to make you an offer, whenever you're ready to sell.
When you sell your home for cash, you can expedite the closing process by eliminating the financing and appraisal contingencies from the contract. This could save you weeks or even months expenses related to the house, such as taxes, maintenance, and insurance.
In addition, this can be a good option if you’re dreading the thought of staging and showing your house (especially if you just went through the whole rigamarole not too long ago).
So, don’t hesitate to at least see your home’s Simple Sale price without any pressure — you’ll be under no obligation to accept an offer you receive.
What to watch out for when selling your home with a mortgage
While it may seem simple on the surface, selling a home that isn’t fully paid off can present challenges.
Here are a few issues to look for and discuss with your real estate agent:
When you have to sell and buy at the same time…
Typically a homeowner will have little trouble using the proceeds of their home sale to pay off their existing mortgage balance. The challenge arises when this homeowner is also trying to purchase their next residence at the same time.
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. If you find your dream home before your current one sells, you’ll need to navigate the juggling act of multiple transactions. 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)
- Go ahead and purchase the home before your new home sells, if you can swing the finances (requires significant cash reserves and disposable income)
- Seek an offer from a cash buyer to ensure the speedy sale of your existing residence
- Look into a Home Trade-In program, akin to trading in your car to the dealership
While they aren’t as common in today’s market, you may be subject to a prepayment penalty if you look to sell your home particularly quickly after purchasing.
Because many financial institutions rely on interest payments as revenue, some mortgage lenders will penalize sellers looking to prematurely pay off a mortgage faster than the originally agreed upon time frame of the loan.
While it varies by lender, the penalty is typically structured as a percentage of interest-only mortgage payments for a set amount of time, i.e. 75% of six months of interest-only payments. A good real estate agent will help you be able to determine whether this type of penalty applies.
The direction of the real estate market
Selling a home before it’s paid off can be simple, so long as your home hasn’t declined in value since you bought it. If your home is worth less than the outstanding balance on your mortgage — that’s called being underwater — things become more complicated.
“After the so-called crash in 2007 and 2008, that was a problem,” Carter says. “The home values had gone down, so sellers owed more than what they could sell their home for.”
In this case, a homeowner would have to take all of the money from the sale of their home as well as any personal funds in order to fully pay off their mortgage.
Today, we don’t really have that problem as most real estate values have gone up. However, it’s something to be aware of in order to sell your home at the right time. According to National Mortgage News, approximately 3.4 million homes — or 6.2% of mortgage properties — were considered underwater in Q2 2020, down from 6.6% in Q1.
Timing and logistics of getting your next mortgage
You’ll also want to discuss with your real estate agent the climate of your area’s mortgage market, says Carter. In growing cities where buyers outnumber the supply of available homes, some lenders will restrict your ability to apply for a new mortgage before you’ve sold your current property.
“I tell my sellers to wait to look until they have a contract on their home,” Carter says. “There’s no point in going out because they’ll see things, and their offer won’t be accepted or it’s going to be gone.”
In hot markets and depending on your finances, you may need to have a contract on your existing home before a financial institution will approve your next mortgage.
Waiting until you have a contract on your current home before you start shopping for your next property can present something of a logistical challenge. Often times, real estate agents can work together to allow the homeowner to remain in their home another 10 to 15 days after the closing to allow for extra time to shop around.
If that’s not enough time, temporary housing may be the solution.
Shop around for the right lender
No matter how many times you’ve sold a home or taken out a mortgage, it’s always important to shop around for a lender that provides the best loan terms.
“Mortgage companies, banks, they all really vary in products, rates and fees,” Carter says. “I always advise people to talk to at least three and get an idea of what they can offer and what it’s going to cost you.”
While mortgage rates will likely fall in a narrow range from bank to bank, fees can vary dramatically. Getting a good understanding of all the different components can end up saving you thousands of dollars. The key here is to make sure only a small handful actually “hard pull” your credit, which can actually bring down your credit score.
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