Selling A House With A Mortgage: A Guide
Kevin Graham7-minute read
April 06, 2023
As a homeowner, one day you might find yourself looking to sell your home before your current mortgage is paid off. If you’re not familiar with selling a home that still has a mortgage attached to it, this process might feel overwhelming or confusing.
We’ll discuss everything you need to know about if and how you can sell a house that is not paid off yet, what costs come with this and how equity plays a role in this real estate transaction.
Can You Sell A House With A Mortgage?
Yes. You can sell your house even if you have an existing mortgage. When you do end up selling your home, you can use the proceeds from the sale to pay off your mortgage balance and any other costs associated with selling your house.
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How To Sell A Home With A Mortgage
Selling a house while paying off your remaining mortgage is incredibly common. Here’s how you do it.
1. Find Your Remaining Loan Balance
The first step is to determine your remaining loan balance. This will help give you an early estimate of how much you can expect to give your mortgage company in order to pay off your loan when you sell your house. At a bare minimum, you want to price your home so that you can pay off your mortgage.
The lower this number relative to your original loan balance, the more existing equity you have in your home. Home equity is the difference between your home value and what you have left to pay off on your home. The more equity you have in your home, the more you are likely to make in a sale after paying off your mortgage, so it’s important to know what this number is.
2. Determine The Right Time To Sell
The right time to sell your house is a complicated question because everyone’s situation is different. Here are several factors to consider:
- Why are you moving? If you have to relocate for career reasons, you might want to move faster than if you’re just downsizing or looking to take advantage of a strong housing market.
- What kind of market is your home entering? There’s a big difference between a buyer’s market vs. a seller’s market. If competition in your area is high and there are fewer homes available for buyers, you can set your home price higher than if it was the other way around. It’s helpful to have your real estate agent do a comparative market analysis.
- Are you confident you can find another house? If you’re looking for another house, you may find that it’s tougher in many markets than it has been in the past. The same conditions that make it a good time for you to sell can make it a difficult time to buy a house.
3. Set A Fair Listing Price
Everyone wants to get as much money for their home as they possibly can. However, there are advantages to setting a fair asking price. Here are couple of them:
- You have a better chance of getting multiple bids. If people think there’s good value at the price point you’ve listed, you’re more likely to get several bidders on your home. In this way, you may actually end up generating a higher sale because it creates more competition between the bidders.
- There’s less chance of fallout. Most people don’t have the ability to make an all-cash offer for a home. Getting a mortgage requires a home appraisal, which places a value on your home in relation to comparable properties in your area. If your listing price is fair and based on reasonable values, the likelihood of the appraisal coming in low and ruining the transaction isn’t as high.
A real estate agent doing a comparative market analysis should help you decide on a fair listing price.
4. Prepare Your House To Sell And Stage
When you’re selling your home, you want to make sure you’re showing it in the best possible light and condition. We recommend all sellers do a few basic things to achieve this:
- Deep clean and declutter. When there’s the potential for many people to be walking through your home, deep cleaning is always a good idea. You’ll also want to declutter. This will not only make you look like a serious seller, but it will also leave a positive impression with potential buyers.
- Remove personal items. You’ll want to remove personal touches from your home, while also giving someone the impression that they could see themselves living in this space. You should leave ample walkways, but at the same time, consider leaving furniture in the space.
- Make small improvements. Small improvements and design updates around the home can make a big difference. Replace knobs on doors and cabinets, put a fresh coat of neutral paint on the walls and even enhance the curb appeal by planting some flowers out front.
5. Cover Closing Costs
Although closing costs are typically thought of as being paid by the buyer, there are certain costs that have traditionally been paid by sellers. Here are a few examples of possible expenses:
- Real estate agent commission: Split between the buyer’s agent and your listing agent, this is usually 6% of the final purchase price of the property.
- Owner’s title policy: This policy is protection for the buyer in case someone comes along in the future with a valid claim to your property. This is often paid for by the seller as a show of good faith.
- Escrow account: The escrow account that many are familiar with is the one that buyers usually have for things like property taxes and homeowners insurance. However, money given prior to the home sale is also held in an escrow account for the protection of both the buyer and seller until the transaction closes. This cost is typically split between the parties.
- Prorated taxes: You’ll pay real estate taxes for the portion of the month in which you live in the home prior to your sale.
- Homeowners association dues: If you live in a home that is a part of a homeowners association (HOA), these dues will also be prorated.
6. Sell The Home And Pay Off The Remaining Mortgage
At the same time you sell your home, you can use the proceeds to pay off the existing mortgage. When you do this, it’s important to get a payoff quote from your mortgage lender. You can’t just send in a check for the loan balance because you will owe interest up until the date of the move.
When you get your payoff quote, it will have an expiration date. As long as you make your payment before that date, the amount quoted is what you owe. Otherwise, a new quote will need to be generated. If you make your payoff prior to the expiration, you’re refunded however much interest you don’t have to pay as a result of selling earlier.
It’s important to note that in some instances you may also have to use your home sale proceeds to pay off other liens, such as those for back taxes or contractor work.
7. Keep The Remaining Funds From The Sale
Once you sell your home and pay off the mortgage and any other outstanding liens, the leftover money is your profit. You can keep it in the bank, pay off debts or use it as the down payment on your next home. Having a larger down payment can help avoid paying for private mortgage insurance.
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Can You Sell A Home With Negative Equity?
Having negative equity means you owe more on your home than it's worth. It's completely possible to sell your home this way, but you need to be aware that you will have to pay off the difference. For that reason, it's usually preferable to hold onto your home until the value rises sufficiently so that you can pay off your mortgage.
If you’re struggling to make your payments and need to move on, one option is a short sale. This is where a lender agrees to take less than you owe on the mortgage, and the sale has to be approved by the lender. This does hurt your credit and impact your future mortgage options for a period of time, but it’s less painful from a financial perspective than a foreclosure.
Can You Qualify For A Mortgage Before Selling Your House?
You might run into a situation where you find your dream home and want to get qualified for a new mortgage loan, but you are still paying your old mortgage on the house you haven’t sold yet. Qualifying and obtaining another mortgage loan is ultimately going to come down to the lender and what they conclude after assessing your debt-to-income ratio (DTI) and credit score. Since you’ll be adding another mortgage payment to your other monthly payments, this will most likely increase your DTI. A high DTI might make lenders nervous that you won’t be able to afford all of your monthly payments, resulting in them not approving you for another mortgage. But if your DTI is still on the lower side paired with a good credit score, lenders will feel more confident in approving you for a new mortgage loan.
Most of the time in this type of overlap situation, your current home will be sold and you’ll have time to figure out what to do with the rest of your existing mortgage before you buy a new home. Timing is everything, especially when finances are involved – so keep this in mind if you’re ever in this type of unique situation.
The Bottom Line
You can certainly sell a house with an existing mortgage, but it’s important to consider your existing balance and whether it’s the right time for you to sell. Your real estate agent can help you set a fair listing price and give you tips on preparing to sell. You can use the proceeds from your sale to pay off your existing mortgage and any other liens. What’s left is yours.
If you’re ready to purchase a new house while selling your existing one, get started on your mortgage application today. You can also give us a call at (833) 326-6018.
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