Can You Sell a House with a Mortgage: Your Essential Guide

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|10 min read

The most common mortgage length is 30 years, which means buyers in 2020 will continue to pay off their homes until 2050. Buying a house is a great investment, but not everyone wants to live in the same place for 30 years. You might need a bigger home as your family expands or might want to move to a different state. Can you sell a house with a mortgage? 

There is good news if you are ready to find a new home: selling a house with a mortgage isn’t as difficult as you might think. Use this guide to become more familiar with the home sale process and how a mortgage will affect your move.

Understanding Mortgages and Home Selling

A mortgage is a loan from the bank that allows you to purchase a home. Until you pay off your mortgage, the house you live in isn’t fully yours. It technically belongs to both you and the bank. When you sell your home, you will use your profits to pay off the bank and keep anything that remains. 

The total revenue from your home sale will be determined by the real estate market and your mortgage balance. Use the following example to guide your own calculations. 

  • A buyer submits a $50,000 down payment and receives a $200,000 loan to buy a house for $250,000.
  • Over a few years, the loan drops to $175,000 through regular payments. This brings the owner’s home equity up to $75,000. 
  • Market trends increase the value of the home and the owner lists it for $300,000. 
  • When the home sells, the bank receives the remaining $175,000 while the seller receives $125,000. 

This example doesn’t cover costs like Realtor commissions, money spent on upgrades, and interest paid to the bank over time; however, the buyer-turned-seller is able to grow their home equity through mortgage payments and then approach their next home purchase with a larger down payment because of these payments and positive market trends.

Is It Possible to Sell a House with a Mortgage?

It is possible to sell a house with a mortgage. However, the home’s value needs to exceed the loan owed to the bank. For example, if you are selling a house for $200,000 and you owe $225,000 to the bank, you will lose money on the sale. (This also doesn’t include the real estate commission you owe your agent.) 

The state of the mortgage is one of the first questions your real estate agent will ask when preparing to sell your home. They need to make sure you can move without losing money. 

If the value of your loan is worth less than your home value, you should have no problem moving forward with the home sale.

Steps to Selling a House with a Mortgage

If you are ready to move, follow these steps to sell a house with a mortgage. You will be better prepared to sell if you are aware of your loan balance, your monthly mortgage payments, and any fees that come with paying off your loan early.

Checking Your Home Equity

Simply put, your home equity is how much your home is worth minus how much you owe on your mortgage. If your home is worth $400,000 and you have $100,000 remaining on your mortgage, then your equity is $300,000. It doesn’t matter what your down payment was, your worth is based on the current real estate market when you sell. (For reference, home equity loans are based on the value of the home at the time, not how much the owner has put into it.) 

Your Realtor can provide an estimate of the value of your house to understand your existing equity. You can also learn how much equity you have by getting a home appraisal. 

Calculating your equity will confirm whether selling your home would be a profitable move and can help you set a budget for commissions, moving costs, and a future down payment on your next home.

Contacting Your Lender for a Payoff Quote

Once you have an idea of your equity, talk to your mortgage lender about paying off your loan. Your mortgage lender should provide a payoff statement that details what you need to pay to close your loan and how to do it. 

It is important to get this statement in writing because a verbal payoff estimate isn’t legally binding. The letter will also have a date for when the payoff amount expires. If you don’t pay off your loan within that window, you will need to get a fresh quote. 

You can use your mortgage balance to get a rough estimate of your equity, but this payoff quote will give you a concrete number for any processing fees and prepayment penalties that will be added when you sell your house and close the account.

Estimating Your Net Proceeds

Once you have a home appraisal in hand and a payoff quote from your mortgage lender, you will have a better idea of your net proceeds – or how much you stand to profit from the sale. Along with subtracting the loan payoff from the appraised value, here are a few other things to consider: 

  • Calculate the real estate commission rates you expect to pay to your Realtor – usually around six percent of the home’s value. 
  • Add between one and three percent of the home’s value for estimated seller closing costs. Use online calculators to track these costs. 
  • If possible, create a budget for moving costs as well. 

Your real estate agent should be able to help you calculate your home sale profit once your home is listed. However, it’s a good idea to understand your sale proceeds before you decide to move. These calculations will confirm that you are making the right decision and help you form a budget for your next home.

Working with a Reliable Real Estate Agent

If you are easily overwhelmed with financial concepts or are simply new to the home sale process, make sure you hire a real estate agent you can trust. They will walk you through these financial estimates to highlight your profits. 

Your Realtor will also provide a reliable local market estimate using comparable sales in the area. This way you won’t overestimate the value of your home and then have to recalculate your profits after multiple price drops. A good agent also won’t undervalue your home, potentially causing you to earn less than you could have on the sale.

Preparing Your House for Sale and Setting the Price

Understanding your home value is only the first step in listing your property. The comparable properties used when providing an estimate are only jumping-off points for what buyers might want to pay. 

You can decide how much you want to put into your house to increase its value. For example, you might replace an old roof or invest in fresh landscaping to make your home more desirable. While these efforts might eat into your profits at first, you could recoup the majority of your investment in the form of a higher-value sale. Conversely, other homeowners are happy to set a lower price if it means selling a home as-is (which means they don’t have to work to improve it before the listing date).  

Get to know the real estate industry in your area and see which upgrades generate higher returns on investment and which ones might price your home out of the market.

Completing the Sale and Paying Off the Mortgage

Once your house is ready to be listed on the market, you can move forward with scheduling showings, receiving offers, and closing on the property. 

At the closing date, you will receive a direct deposit from the bank for the profits of your sale. Your Realtor and title company should remove the mortgage payoff and other closing costs beforehand so you don’t have to worry about it. However, you will receive documents proving that the loan has been paid off and the property is no longer yours. 

Any funds deposited to your bank are yours to keep and can be used for future home purchases.

What Happens to Your Mortgage When You Sell?

When you sell your house, the profits from the sale are divided up at the closing appointment. Your Realtor will take their commission (and the buyer’s agent will take theirs). The title company will need to be paid and it will take its fees. Other closing costs will also be removed. Finally, your mortgage lender will receive its payment (which is the mortgage balance listed in the payoff quote). Any remaining money is deposited into your bank – these are your profits. 

Because your mortgage loan is paid off through the sale, it is essentially closed after the sale. Your relationship with that lender is over. The payoff of this loan (along with your mortgage payment history) will likely show up in your credit reports and can help you secure loans and additional mortgages in the future.

The Consequences of Selling a Home that’s Underwater

In a perfect world, your house will increase in value enough to cover all of your closing costs, commissions, and outstanding mortgage balance while still allowing you to turn a profit. However, this isn’t always the case. There may be a time when you have negative equity in the home – which means you owe more on the loan than the house is worth. For example, if you owe $250,000 to the bank but a turn in the market means your house sells for $230,000 then you will sell your home with mortgage debt. 

If at all possible, avoid selling underwater by waiting until the market changes and you pay off more of your loan to list your home. It might take a few years, but you can keep making monthly payments on your mortgage while your home (hopefully) increases in value. You can also make improvements to the property to increase its potential selling price. 

Unfortunately, it’s not always possible to wait to sell a home. If this is the case, you might be able to enter a short sale on the property. You will set a fair listing price and recoup as much of the money as you can to pay off the remaining balance on the loan. This option is often seen as a better alternative than entering foreclosure, but it can have financial drawbacks for the seller and the lender. 

Understanding Short Sales

If an owner is facing foreclosure, they can approach the lender with the idea of entering a short sale. Lenders often agree to short sales so they can close risky loans and recoup the majority of their funds. (It is better to get 80% of a loan back than none of it.) During the short sale, the former owner will pay off as much of the mortgage as they can and close the account. 

The owner needs to prove that they are in financial distress to enter the short sale. In this case, they cannot sell the house without the lender’s approval. A short sale will hurt a seller’s credit score, but not as much as a foreclosure. While a short sale is a lot of work, it is seen as a fair option for both parties and might protect your financial health in the long run. 

The Bottom Line

Selling a house with a mortgage is an incredibly common feat – thousands of homeowners go through these steps each year. First, look at your mortgage terms to identify any fees or prepayment concerns. Then review the mortgage process with your Realtor to make sure you can sell. They will review your estimated proceeds and make recommendations to increase your home’s value. 

If you’re considering selling a house with a mortgage, let FastExpert help you navigate the process with ease. Our top-rated real estate agents are ready to assist you. Contact us today to find out more.

FAQs 

1. Can you sell a house with two mortgages?

It is possible to sell a house with two mortgages; however, you still need to make sure you will profit from the sale. Estimate the equity of the home and the profits from selling the house after the mortgage balances are paid off. Along with tracking the mortgage payments, make sure you won’t owe any prepayment or processing fees that will reduce your overall profits.   

2. What is a mortgage prepayment penalty and how does it affect the sale?

A mortgage prepayment penalty is a fee the borrower pays when they fully pay off the loan earlier than expected. For example, if you pay off your loan 10 years into a 30-year mortgage, you might have prepayment penalties. 

These penalties are highly unpopular and becoming less common. You will pay these fees (and other closing costs) when you sell your house. You can identify any potential prepayment fees in your mortgage payoff letter. 

3. What happens if you owe more on your mortgage than your house is worth?

If you own more than your home is worth, then you have negative equity in the home. This means you will lose money on the sale (even before you cover your real estate agent commission fees). 

If you owe money to the bank and need to move, you might be able to complete a short sale, which is a way to prevent foreclosure on the home. The bank agrees to receive less and close the loan in order to recoup their lost funds. 

4. Can you buy a new house before you sell your old one with a mortgage?

One of the challenges of selling a house with an existing mortgage is that you can’t buy a new house until you close on your old one. You will need to complete the selling process and receive the net proceeds on your home in order to use them as a down payment on your next property. 

However, you can make an offer on a new house with a contingency clause that your current one needs to sell first. 

5. What are the tax implications when selling a house with a mortgage?

There might be some benefits to selling a house with a mortgage. For example, capital gains taxes (and other real estate taxes) are often calculated based on your home sale profit. If your mortgage is large enough, your profits might fall below these tax thresholds, helping you save money. This is a significant consideration if you are selling an investment property or a second home.

Amanda Dodge

Amanda Dodge is a real estate writer and expert. She has worked in the field for more than eight years. She spends her time writing and researching trends in real estate, finance, and business. She graduated with a bachelor's degree in Communications from Florida State University.

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