In 2018, more than three-quarters of Americans purchase their homes with a mortgage rather than cash.
The average length of time an American homeowner will live in their home is 12 years, but most mortgages are 30-year loans. This means that a lot of houses in the U.S. are sold when the mortgage isn’t fully paid off.
So does that mean you can you sell a house with a mortgage? What happens to your mortgage when you sell your home?
Come with me and we’ll learn everything you need to know about selling a house with a mortgage.
What Exactly is a Mortgage? How Do They Work?
A mortgage is a loan from a lender for property or real estate. If you take out a mortgage, you’re known as the borrower. The lender agrees to give you cash upfront for your real estate purchase, and as the borrower, you agree to make payments over time to pay them back.
Mortgages are most commonly paid back over 30 years. It’s also possible to obtain a 15-year mortgage, and less typically a 40-year term.
When you take out a mortgage, you’ll agree to pay interest on the loan in addition to the principal amount. Your interest rate will be determined at the time of the agreement, and it can be either a fixed or an adjustable rate.
Okay, Got It. But Can You Sell a House With a Mortgage?
I know, I know. The reason your hear is to answer the question: can you sell your house before paying off the mortgage?
The short answer is yes. But like everything having to do with loans and mortgages, the answer is more complicated than that.
First, Find Out Exactly How Much You Owe
The first thing you should do if you’re listing your home for sale is to contact your lender. They’ll be able to give you a payoff amount, which shouldn’t be confused with your remaining loan balance. This quote will expire after a certain number of days.
While you’re talking to your lender, you’ll also want to double-check whether there’s any penalty for pre-paying your mortgage. If so, this could mean a substantial additional fee.
When You Sell Your House, The Due-On-Sale Clause is Triggered
The mortgage agreement you signed includes a due-on-sale clause that is triggered when you transfer or sell your home. This means that if you still owe money on your house at the time of the sale, the lender is allowed to demand full repayment at that exact time.
So where does the money come from to give the lender the payoff amount?
Hopefully, you’ll have enough equity that you can pay off the loan balance and closing costs with the buyer’s funds. In the best-case scenario, there will be money left over from the buyer’s funds after covering all the costs. The rest of the funds are your profit.
When You Sell Your House, What Happens to the Equity?
The equity is the amount of your property or home that you actually own. The two different types of equity are home investment equity and earned equity.
Home investment equity is the equity you gain through actual financial investment. Earned equity is equity that’s realized upon the sale of your home. It results from your local real estate market having increasing home values and through renovations or upgrades that contribute an additional return on investment.
When you sell your home, a number of different parties split up the buyer’s funds.
First, the lender is paid back the remaining loan amount. If you’ve taken out a home equity loan or another type of loan, the will be paid off next. Then the buyer’s funds cover the closing costs, which can include taxes, escrow fees, and real estate agent commissions.
The more equity you had in the property, the more likely they’ll be money left over after all of these costs. Anything left over goes right in your pocket.
What if You Don’t Have Enough Equity to Pay Off Your Mortgage?
This is what’s known as being underwater or having negative equity.
If you’re finding yourself in this position, you have a couple of options.
1. Wait To Sell
If your mortgage is underwater, the best thing you can do is wait to sell until the market is more favorable. Of course, this is not always an option for people.
2. Bring Cash to the Closing
The next option is to cover the difference yourself. Depending on how much you still owe after the buyer’s funds, this might be more or less possible for you.
If there’s a small amount left on the loan and you really want to get rid of a property, this might be your best bet.
3. Sell With a Short Sale
This option requires your bank to allow you to sell your home for less than you owe.
While this might help you get out of a bind, there are some pretty negative potential consequences. Selling with a short sale will seriously ding your credit, and you’ll have to forfeit your original down payment. Both of these things could make buying another house very difficult.
If You’re Selling a House With a Mortgage, You’re Not Alone
Selling your home can be stressful and complicated. Questions that had never before occurred to you all of a sudden fill your mind. Can you sell a house with a mortgage? What happens to your mortgage when you sell your home?
Though the whole process might feel overwhelming, selling house with a mortgage is more common than you’d think. While 32% of Americans live in houses with no mortgage, the rest of us must sell mortgage-laden properties when it’s time to move.
Are you trying to sell your home in Colorado Springs fast, but you want to get a fair price for it? Contact us and you could sell your house in as little as 7-10 days!
