Can you sell your house before paying off the mortgage? Yes, you can sell your house even if you haven’t paid off the mortgage yet. Turns out, it’s a fairly common thing which happens more often than you may think. Many people even choose to relocate before paying their mortgage in full. After all, most mortgage loan terms last for 15 to 30 years and few homeowners stay in their houses for that long. Selling a house with a mortgage simply means you have not satisfied your home loan yet and still owe money to your lender. Instead of waiting for the mortgage lender to foreclose and repossess the real estate property, selling your home can be a good way to repay the remaining loan balance and enjoy the proceeds coming from the sale.
So, how does selling a house with a mortgage work? Here are the important steps that you need to know.
Step #1 – Figure Out How Much Is Left on Your Mortgage
If you’re thinking about selling a house before the mortgage is paid in full, the first thing you need to do is find out roughly how much you still owe. Why does this matter? Knowing your outstanding loan balance helps you set a selling price. In addition, you’ll need to use the money from your home sale to pay off your mortgage loan.
So how to find out how much is left on your mortgage? Simply contact your mortgage lender and ask for your current payoff amount. This is the total amount you’ll have to pay in order to satisfy your mortgage loan terms, including any interest you owe. The payoff amount you’ll receive is generally valid for 10-30 days before additional interest accrues and changes the amount. Keep in mind it’s not the same as your current balance (which will appear on your most recent account statement and may not include interest). Your mortgage lender is required to provide you with this information, so don’t be shy about asking.
Related: 20 Tips for Selling Your Home in 2020
Another important point to remember when selling a house with a mortgage is to review your mortgage loan paperwork and look for due-on-sale clauses. Due-on-sale clauses protect mortgage lenders by requiring homeowners to pay their mortgage loan in full after selling their house or transferring their deed to someone else. Aside from that, your lender’s involvement in the home sale will be limited. They might ask for some information about the buyer’s lender, but as long as the buyer can be preapproved for a mortgage loan, they can’t tell you who you can or can’t sell your house to.
Step #2 – Hire a Real Estate Agent
Whether you’re selling a house with a mortgage or after you pay off your mortgage, you’ll need the help of a real estate agent. You might think of going for a “for sale by owner” approach, but that’ll only add on more work and unnecessary stress. For example, one of the first things an agent will do is open an escrow account on your behalf (if you’re selling FSBO, you’ll have to take care of this step). Moreover, a real estate agent usually works with a title company to ensure that there are no issues with your property’s title, a real estate lawyer to prepare loan closing documents and a settlement statement, and a home appraiser to estimate the value of your property.
Of course, the biggest help you’ll get from your agent is that he/she will run a comparative market analysis to set a reasonable selling price for your home. Ideally, you want to be selling the property for an amount that covers your mortgage payoff, closing costs (including a 5-6% agent commission, taxes, attorney fees, and transfer fees) as well as any other expenses that you may incur while getting your home ready to sell. Your agent should be able to help you calculate your profits and give you an idea of how much you can fetch from the home sale.
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Step #3 –Market the House & Close the Deal
If you find that you’re able to sell your house and make enough profits to pay off your mortgage in full, it’s best to begin marketing the property for sale as soon as possible. It’s important to try and sell your house quickly because you’ll continue to be responsible for mortgage repayments until the deal is closed. So ask your real estate agent how much time he/she thinks it’ll take for the house to sell. If your timeline doesn’t allow for waiting around for a buyer, you might want to consider selling to a real estate investor.
Real estate investors often offer to buy houses for cash “as-is”. So if you want a simple transaction when selling a house with a mortgage, selling to an investor is your best option. This also means that you’ll get the funds from selling your house within a few days. When selling a house before the mortgage is paid, you’ll be in touch with your mortgage lender again for an exact payout amount. The home sale funds are used to pay off the mortgage in its entirety and cover transaction costs. Any remaining amount then becomes your profit, which will hopefully be enough to make a future real estate investment or buy a new home.
Related: How Much Will an Investor Pay for My House?
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What Happens If You Have Negative Equity?
As mentioned, an ideal situation would be that the selling price of your home would be enough to pay off the mortgage loan and cover other costs. But, what if your property is not worth what you currently owe to your mortgage lender? In this case, the best option for selling a house with a mortgage would be to arrange a short sale with your lender. In a real estate short sale, the lender agrees to take a reduced payoff amount in order to facilitate the sale and not foreclose the property. Meaning, they’ll accept a repayment which is lower than the total sum owed for the mortgage debt and the full net proceeds from the sale will go towards paying your lender.
We’ve prepared multiple blogs that discuss everything you need to know about short sales. To learn more, read: The Short Sale Process: How to Sell and Buy a Short Sale Property.
Can You Sell a House with a Fixed-Rate Mortgage?
While some types of mortgage loans make selling houses beneficial in financial terms, others can make selling a house before the mortgage is paid difficult. We’re specifically talking about fixed-rate mortgages. As the name suggests, the interest rate of fixed mortgages stays the same for the life of the loan. Meaning, your mortgage payments will remain the same regardless of any fluctuations in the rate.
The purpose of a fixed-rate mortgage is to protect homeowners and borrowers from increasing rates, meaning mortgage payments can’t become more expensive. However, borrowers could also miss out on benefiting when mortgage interest rates drop. Another benefit of this type of mortgage loan in that they are portable. In other words, when buying a new property, you can transfer the mortgage from your old house to the new one. But one thing to keep in mind about fixed-rate mortgages is that they’ll charge you a prepayment penalty between 3%-5% of the loan if you want to exit before the end of the fixed term.
What to Watch Out For When Selling a House with a Mortgage
The most important challenge to watch out for and discuss with your real estate agent is the above-mentioned prepayment penalty. Many financial institutions rely heavily on interest payments as revenue. This is why some mortgage lenders will penalize sellers looking to pay off a mortgage earlier than the originally agreed-upon timeframe of the loan. It varies by lender, but the penalty is typically structured as a percentage of interest-only mortgage payments for a set amount of time. A good selling agent should be able to help you determine whether or not a prepayment penalty applies.
The Bottom Line
As you can see, selling a house with a mortgage may be possible depending on your situation. Whether or not you’ll make money from this real estate transaction depends on how much is left on your mortgage, the selling price, and how much you’ll have to pay in transaction costs. Remember – the earlier you sell your house, the better. So if you’re planning to sell your house before the mortgage is paid, don’t waste time and sign up to Mashvisor to market your house to real estate investors in the US housing market and get an offer quickly!