Key takeaways
- Selling a home with a mortgage is common and generally not a problem.
- However, it can become problematic if the homeowner owes more on their mortgage than the home is worth.
- When selling a home with a mortgage, the seller must settle the outstanding loan balance during the closing process, along with any other fees or closing costs. Any remaining proceeds from the sale are considered profit.
You’re thinking about selling your house, but there’s one thing holding you back: You still have a mortgage. Will the amount you owe on the loan make it difficult to sell?
The short answer is, no, you shouldn’t have a problem — in fact, it’s very common. “Most people who sell their homes have outstanding mortgages,” says Melissa Cohn, regional vice president of William Raveis Mortgage in New York City and Florida. “Having a mortgage does not get in the way of the sale of a home, as long as there is enough equity to pay it off in full when they close.”
While a mortgage is technically an encumbrance on your home, which means that someone else (namely, your lender) has a claim on the property, it’s usually not considered a cloud on the title. And it’s an issue that’s easily resolved: You settle the outstanding balance when you complete the sale; it’s often part of the round of exchanged funds that occurs during the closing. This expectation that you’ll use the sale proceeds to repay the debt is the reason the lender is letting the sale go forward.
Can you sell a house with a mortgage before it’s paid off?
Yes. You don’t need your mortgage to be fully paid off in order to sell your house. The important thing to remember is your home equity, which is the difference between your home’s current market value and what you still owe on the mortgage. Here’s how it works:
Let’s say your home is worth $250,000, and you still owe $100,000 on your mortgage. You have $150,000 in equity. When you sell the house, that $150,000, minus closing costs and other expenses, is what you’ll receive when the deal is completed, assuming you sell for the full $250,000.
In other words, as long as you sell your home for more than the outstanding mortgage balance, you can use the sale proceeds to pay off the loan. If you can afford to, a great way to increase your equity is to make a 13th mortgage payment every year, specifying that it should be applied to the principal. This pays down your mortgage faster by reducing the interest paid on the outstanding balance.
Keep in mind that you’ll have to pay closing costs when you sell. So if your equity is just barely positive, it might not be enough. If you don’t have enough equity in your home to repay the mortgage with the proceeds from the sale, you’ll have to use other funds — such as savings — to make up the difference.
How to sell a home with a mortgage
In general, you must pay off any mortgage or loans secured on a home when you sell the property. You can list the property for sale and go through most of the process while still owing a balance, but you must pay the loan off in full as part of the closing. Here are four steps to follow when selling a house with a mortgage.
1. Contact your lender for a payoff statement
If you’re considering selling a home with an outstanding mortgage, the first thing to do is to ask your lender for a payoff statement or letter. This document tells you exactly how much you’ll need to pay the lender when you sell. The payoff amount will change every month, even on a fixed-rate mortgage, since you’re making monthly payments. So be prepared to get a second statement when your closing date is set.
The statement will have instructions for how to submit your final payment. It will give you the specific amount to pay, including any accrued interest and other charges, as well as the due date for the payment. It may also include penalties for prior late payments or an early payment penalty.
2. Estimate home value and net proceeds
Once you know how much you’ll need to pay off, it’s time to estimate the value of your home and the amount you can expect to receive from selling it.
There are many ways to estimate how much your home is worth, but a good place to start is to look for comparable homes, or “comps,” in your area that have recently sold or are on the market now. If you already have an agent, they can help you find these and provide helpful context.
You can also enter your address into an AVM, or automated valuation model. These online tools can also help you estimate your home’s worth, though they are not guaranteed to be accurate. You’ll get the most accurate valuation by hiring a professional home appraiser.
Remember that if you owe $150,000 on your mortgage and sell your home for $300,000, that remaining $150,000 isn’t all pure profit. Selling a house costs money: There are closing costs to pay, and possibly real estate agent commissions and attorney fees as well. Some of the proceeds will go toward that. Make sure that your actual net proceeds are sufficient to pay off both your mortgage and the fees and closing costs. You should get a settlement statement before your closing that outlines all these expenses.
3. Find an agent and set a fair listing price
If you feel that the net proceeds you will earn can cover the remaining balance of your mortgage and fees, start looking for a real estate agent. Finding a good agent who you like is essential, because you’ll be working closely with them throughout the sale process.
A savvy real estate agent can help you understand the local market, set a fair listing price for your home and generate buyer interest. They can also help you analyze any offers that you receive to make sure you’re getting the best deal possible.
Your agent should also prepare a seller’s net sheet for you — a kind of itemized work or balance sheet, detailing estimated costs and giving a sense of how much you stand to gain once a deal goes through. Ideally, your agent will send you an updated seller’s net sheet with every offer you receive so you can make an apples-to-apples comparison between the bids and see which will net you the most money.
4. Sell the home and pay off the mortgage
Once you accept an offer — congratulations! — it’s time to sign the purchase and sale agreement, which begins the closing process. You’ll likely have to wait for things like the buyer’s appraisal and inspection to be completed before you’re ready for closing day.
When you close on the sale, you’ll use the proceeds to pay off your mortgage lender and any outstanding fees or closing costs. A representative of the lender will be at the closing to collect the money due to them. Whatever is left after that is your profit — that’s the money you get to keep, aka the net proceeds. For example, if you sell for $300,000 and owe $150,000 to pay off the mortgage, plus $20,000 in closing costs, your profit will be $130,000.
Selling a home that’s underwater
One instance where you may have trouble selling a home with a mortgage is if you have negative equity — sometimes called being underwater or upside down. This means your home is currently worth less than what you owe on the mortgage.
Imagine you buy a home for $300,000, putting down 20 percent and borrowing $240,000. Alas, the local real estate market tanks, and you find you can only sell the home for $215,000. If you still owe $225,000 to your lender, you won’t be able to sell your home at a price tag that allows you to pay back what you still owe. You’re underwater.
You have a few options in this situation:
- Offer a short sale: You need the permission of your lender to sell the property for less than your current mortgage balance; the bank must agree to take a loss. If you get approved, your bank will have a say over whether to accept or reject offers. While this situation allows you to walk away without having to pay the entire balance on your loan, it is not ideal for your credit score: “A short sale is the credit equivalent of a foreclosure, so it dings your credit for a seven-year period,” says Cohn.
- Pay out of pocket: If possible, you could make up the difference out of your own savings or by selling investments. In the above scenario, this means coming up with $10,000 to pay back the remainder of the loan. Dipping into assets isn’t ideal either, but this option will preserve your good credit — helpful if you need to rent a new place to live or plan to apply for another mortgage soon.
- Put your sale on hold: If you can put off selling your home for the time being, you may want to consider waiting. Renting out the property, if the rental income covers your mortgage, might allow you to hold on to it until its market value (or your financial situation) improves. Over time, the real estate market could change and you may find yourself in a better position to sell for a profit — or at least break even.
Underwater homeowners should weigh their options carefully, Cohn says: “Are you being relocated for work? Are you no longer economically strong enough to make the mortgage payments? Do you have an adjustable rate that’s going to go up? If you want to sell just because you want to get out and move, you probably should wait.”
What happens to your mortgage when you sell your house?
You can sell a house with a mortgage —when you sell, you pay off your mortgage balance on the home in full. That means you’ll be done with that debt.
If you’re paying ahead of the preset schedule, you might be charged a prepayment penalty or early repayment fee. In addition, many mortgages involve an escrow account. If any money related to your mortgage is in escrow, the balance of that account will be refunded to you. (Escrow funds won’t be turned over at the closing table, though — it may take a few months.)
Assumable mortgages
If your loan is backed by a government entity like the FHA, VA or USDA, you may be able to sell the house with an assumable mortgage. This means that, rather than you paying off the existing mortgage and the buyer starting fresh with a new one, the buyer takes over your existing loan, with the same terms.
Crucially, this includes the interest rate. So, instead of securing a new loan at today’s higher rates, the buyer can assume your existing, lower-rate mortgage — certainly a compelling option. However, the loan is only assumable for the remaining mortgage amount on your property.
FAQs
Only if you’re underwater. If you owe more on your mortgage than the current value of your home, your mortgage could make a traditional sale impossible. Your lender might refuse to let you sell the home for less than the outstanding balance, and buyers (and their lenders) might balk at a price so much higher than the home’s appraised value. If your home is worth more than you owe, though, you are not likely to have a problem.
We’ve covered what happens to your mortgage when you sell your house, but what if you earn quite a bit on the sale? Ideally, your home will have appreciated in value while you owned it and will sell for more than you paid for it. Depending on how much profit you make, you might owe capital gains taxes. Typically, to trigger capital gains tax in real estate, the home would have to have been your primary residence, and you would have to have made a significant amount — hundreds of thousands of dollars — on the sale. If you sell a primary residence, you can exclude the first $250,000 in profit, or the first $500,000 if you’re married and file taxes jointly.
