How To Sell A House With A Mortgage
Before you can sell a house with a mortgage, there are certain requirements you must meet. First, your mortgage is a legal obligation, so you must satisfy it if you sell the house. In other words, you can’t sell the house and not pay off the mortgage. You must clear up any liens on the property before you sell.
If you’re selling a home with a mortgage, there are specific steps you must take in a specific order to ensure you satisfy your legal obligations.
Let’s take a closer look at the steps and the order you’ll need to take them in.
1. Get A Payoff Quote
The first step to selling a house with a mortgage is to get a payoff quote. This will tell you how much you must pay your lender to satisfy your mortgage agreement and release the lien.
If you’re moving to a new mortgage lender, they’ll likely request the payoff quote for you. However, you can contact your current loan servicer and ask for a payoff quote if they don’t. Some lenders even have automated phone or online systems that make getting a quote even easier.
Your payoff quote will include not only your mortgage balance, but also any applicable fees or mortgage insurance balances, and the date when the quote expires. If you aren’t sure of your closing date, make sure to add a few buffer days into your request. This will help avoid any per diem interest charges if you go past the deadline for your payoff quote so you don’t underpay.
2. Determine Home Equity
You’ll want to know how much home equity you have. It could help you when you buy your next home or otherwise invest the money from your home sale. Some homeowners invest the entire amount of their current home equity in their new home. Others invest some of the profit but keep the rest liquid.
What you do depends on what mortgage you qualify for and how much money you have saved for your down payment.
Home Investment Equity
Home investment equity is the equity you’ve gained in the home caused by an increase in the market value. For example, say you bought your home for $150,000, and now it’s worth $250,000. So, you earned $100,000 in equity in the home just by the house appreciating. You didn’t necessarily have to do anything to earn this equity.
Earned Equity
Earned equity is the equity you invest in the home yourself like the money you pay upfront for your down payment. So, for example, if you put 20% down on a $150,000 home, you have $30,000 in instant equity.
You also increase your equity each month as you make principal payments toward the loan. That means every time you make your monthly mortgage payments, you’re actually increasing your home equity. This lowers how much you owe and increases the difference between the home’s value and your mortgage balance.
Paying any windfalls or large amounts of money you earn toward your mortgage also increases your earned equity. Every dollar you pay toward the home’s principal increases your equity.
3. Market And Sell Your Home
Once you know what you owe, it’s time to put your house on the market. You’ll need to price your home to make sure your asking price can cover your loan balance. A REALTORⓇ or real estate agent will know the local market and can help you price your home competitively.
They can help you set an asking price and ensure you get the best offers on your home. Hopefully, this will help you repay your mortgage balance and fees – and also make a profit.
4. Repay Your Mortgage Lender
Once you know how much you owe and your home sale has gone through, you’ll need to pay off your mortgage lender. Your primary mortgage lender has the first lien position on your home and therefore gets paid first. Make sure you have an accurate payoff quote and follow up to satisfy the debt.
If there are remaining days of unpaid interest, make sure you pay them as quickly as possible to pay your loan off in full.
5. Pay Off Additional Loans, Second Mortgages And Liens
If your home has any other liens, you must also pay them off. Liens stay with the home, not the person. This means if you didn’t clear any outstanding liens on the property, the buyer might not be able to close on the home. In addition, mortgage lenders require a clear title which isn’t possible with outstanding liens.
Common loans and liens you might have on your property include:
Keep in mind that loans like home equity loans and HELOCs are considered second mortgages. Any loan that is secured by your home adds a lien to your property that will need to be paid when you sell your house.
You’ll want to make sure to ask for documentation once each loan or lien is paid in case you need to provide proof of payment in the future.
6. Cover Fees And Closing Costs
You’ll likely have transaction fees and closing costs if you sell a house with a mortgage or without one. While you won’t pay as many closing costs as the buyer, you can expect to cover expenses including real estate agent’s commission, title policy fee, and, in some cases, prorated property taxes. The funds can come directly from the proceeds of the sale if you’re receiving enough to cover your mortgage amount, liens and closing costs.
7. Keep Remaining Funds
Once you pay off all liens on the home, including the first mortgage, any second mortgages or HELOCs, and any other outstanding liens, the remaining funds go to you, the seller. If you choose to reinvest the funds in your next home, it’s a great way to start homeownership with equity by making a large down payment. Making a down payment of 20% or more can help you avoid private mortgage insurance (PMI) and build home equity.
After all your transactions are completed, you’ll receive either a wire or check for the remaining amount. Once the money is yours you can use it any way you like, as an emergency fund, renovating your new home or even saving towards retirement.
