The National Association of Realtors (NAR) agreed to new rules around real estate commissions as part of a lawsuit settlement in March. Now, consumers face a deluge of conflicting predictions.
One narrative predicts a coming utopia for homebuyers: A price war will erupt, and commissions will plunge amid a new wave of competition among buyers’ agents. A competing narrative goes in the opposite direction: Under the new commission structure, buyers will realize they’re on the hook for thousands and decide not to use agents at all. NAR, meanwhile, has portrayed the changes as minor tweaks rather than a major shift.
The competing narratives underscore just how complex Realtor compensation is — and how much more complex it may soon get. Here’s a look at the new commission structure and what it could mean for both homebuyers and sellers.
How real estate commissions work
Traditionally, when a home seller hires a real estate agent to represent their listing, the seller agrees to pay a commission. The national average is about 5 percent of the home’s sale price, with 2.5 percent going to the listing agent and the other 2.5 percent to the buyer’s agent. (On a $400,000 home, 5 percent comes to $20,000, or $10,000 for each agent.) Sometimes the listing agent gets lucky and sells to an unrepresented buyer, keeping the entire 5 percent.
Who pays them?
Even this is a bit murky. Agent fees come out of the seller’s proceeds at closing, but it’s reasonable to assume that the seller adjusts their price accordingly — it’s baked into the home’s sale price. And so it’s the buyer who ultimately pays it, just not directly to their agent: That extra 5 percent is rolled into the sale price.
What’s changing?
NAR’s settlement says nothing about the amount of commissions. The biggest change is that, starting in July, listing agents no longer will make offers of compensation to buy-side agents on the multiple listing service (MLS). In addition, a buyer’s agent must now have a written contract with the buyer specifying the fee. Until now, NAR encouraged but didn’t require written agreements between buy-side agents and buyers.
A federal judge gave preliminary approval to the settlement in April 2024, and the final court approval is expected in November.
Compared to the old model, the new version offers a greater level of transparency — homebuyers now will be fully aware of how much they’re paying for an agent’s services. “It’s always good when people understand what they are and are not paying for,” says David Druey, Florida regional president at Centennial Bank.
While the new rules prevent listing agents from posting buy-side commissions in the MLS, sellers and listing agents still can agree on the amount off the MLS.
“Although sellers can elect not to pay any buyer agent compensation, that doesn’t mean they will avoid the economics,” says Budge Huskey, president and chief executive of Premier Sotheby’s International Realty in Naples, Florida. “Buyers may easily write into any offer a contingency requiring that the seller cover the cost, or may request other concessions, such as closing cost assistance in the dollar amount they are paying their representative.”
Does this mean real estate commissions are now negotiable?
Technically, real estate commissions always have been negotiable — a theme NAR long has stressed. Practically, though, the picture gets complicated. In many cases, Realtors are more skilled at negotiating than their clients, so the consumer comes into the negotiation at a disadvantage. What’s more, the buyer’s agent commission was determined by the seller, not by the buyer. The new rules shift that responsibility to buyers, who now will discuss compensation directly with the agents representing them.
Is this good or bad for consumers?
Some foresee a near-nirvana for consumers. Vishal Garg, CEO of mortgage company Better, predicts the settlement will unleash a “buy-side price war” — buyer agents will begin competing fiercely for clients.
Others fear a darker turn. Ken H. Johnson, a real estate economist at Florida Atlantic University and a former real estate broker, says the new rules just add another layer of complexity to an already-confusing process.
“No longer advertising buyer agent commissions will only create a more confused and drawn-out transaction process as buyers, sellers and agents will have to negotiate the fee, who will pay for it and how much will be paid by each party,” Johnson says. “Due to this added level of complexity, buyers will almost certainly have to negotiate with more sellers before they find the deal they are satisfied with. Thus, the house-hunting period will extend for the average buyer.”
Concerns for first-time buyers
Many in the real estate industry worry that first-time homebuyers — those who need expert guidance the most, and who are already severely hampered by high prices and high mortgage rates — will be priced out of professional representation. If commissions no longer come out of the seller’s proceeds, the thinking goes, buyers won’t have an additional $7,500 or $10,000 to pay an agent.
“Most of those buyers are scraping the barrel to the bottom to come up with a down payment,” says Dave Liniger, chairman and co-founder of RE/MAX. (The firm was one of the large brokerages named as defendants in the suit along with NAR; RE/MAX settled last year for $55 million.)
For now, buyers can’t roll commission costs into their mortgages under the new rules. But industry players widely expect the Federal Housing Finance Agency, overseer of mortgage giants Fannie Mae and Freddie Mac, to change those rules.
“I think there’s going to be pressure on them to allow that,” Liniger says. “The industry needs first-time buyers.”
Indeed, NAR already has been attempting to nudge the mortgage industry in that direction: “We are talking with Freddie and Fannie to see what can be done,” says Lawrence Yun, NAR’s chief economist.
Key takeaways
- When you owe more on your mortgage than your house is worth, the loan is referred to as ‘underwater,’ or in a state of negative equity.
- Having an underwater mortgage makes it harder to sell the home or refinance.
- If you have an underwater mortgage, your options include staying put and waiting for the home to appreciate, trying to get a new loan or requesting a short sale.
What is an underwater mortgage?
“Being underwater or upside-down on a home, car or any other asset means that you owe more than the current value,” explains Greg McBride, chief financial analyst at Bankrate. That is: The asset is worth less than the amount you borrowed to buy it, or the amount of the debt you still have to repay.
For example, if you buy a house when prices are high and the real estate market then retreats, your home’s value can depreciate, or shrink – and, as a result, you could wind up with a mortgage balance that outstrips that value. When that happens, you’re considered underwater on your mortgage. It’s also known as having negative equity.
For example, say Jane bought her home for $300,000, made a $30,000 down payment and borrowed $270,000. Two years later, a recession hits her city and Jane becomes unemployed, but has an excellent job opportunity in another state. She needs to sell her house and move, but she learns that home values in her area have declined and her house now has a market value of $250,000 — and, she still owes $258,400 on her mortgage. She is now underwater, or upside-down, on the mortgage.
How does an underwater mortgage happen?
Underwater mortgages usually occur during an economic downturn in which home values fall, says Jackie Boies, senior director of Partner Relations for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. During the 2007-8 subprime mortgage crisis, for example, the housing market collapsed, and many borrowers were saddled with homes worth far less than they paid.
Housing values can also decrease as a result of rising interest rates, high numbers of foreclosures or natural disasters.
In addition to declining home prices, homeowners can find themselves in this financial situation when they buy homes with little or no money down, says McBride: “Even a stagnant home price can leave you upside-down if you wish to sell the home soon after, because the transaction costs of selling could more than offset what little equity you have.”
Another way to become upside-down would be to take out a second mortgage that depletes most or all of your ownership stake; borrowing more than 100 percent of the value of the home, or taking out a mortgage that would result in negative amortization over the life of the loan, says Holly Lott, a senior branch manager at Atlanta-based Silverton Mortgage.
Signs that your mortgage is underwater
Finding out if you’re underwater requires an assessment of your home’s current value. You can use a home value estimator tool to get a ballpark idea, but to know for certain, get a home appraisal. Once you know the value, you can use your mortgage statements to determine whether your loan is upside-down.
Why an underwater mortgage can be risky
Scary as it can seem, being underwater doesn’t have to affect your day-to-day life, especially if you’re planning on staying put. Most borrowers can keep making their payments and “over time can get right-side up by paying down some of the principal balance and/or seeing some appreciation in the price of the home,” says McBride.
Still, there are some times when a homeowner should be concerned about being upside down on their mortgage. These times of risk include:
- Refinancing: People who find themselves in hardship might find it nearly impossible to refinance, unless they qualify for a government program or certain types of mortgages, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
- Selling: If you’re underwater, you will also have a hard time selling. If you can’t make enough from the sale to cover your mortgage balance, you’ll be responsible for making up the difference. Alternatively, you’ll need to apply for a short sale with your lender, in which the bank agrees to accept less than the total remaining mortgage balance out of the sale proceeds. This sort of transactionharms your credit score.
- Losing the home: When a home is underwater, you are at a higher risk of foreclosure if the payments become too much for you.
What to do if you’re underwater on your mortgage
If you find yourself underwater on your mortgage, you’ve got several options to consider.
1. Stay in the home and build equity
In an upside-down mortgage situation, you can choose to stay in your home and continue to make payments to reduce the principal balance on the loan.
“Essentially, you’re riding out the market until values take a turn and go higher,” says Lott. “During this time it would be beneficial to make extra payments on the principal balance of the loan while waiting for home values to rise.”
2. Explore new financing
You have fewer refinancing options if your loan is underwater, but you might not be totally out of luck. Talk to a few mortgage refinance lenders to see what, if anything, you can do to refi your upside-down mortgage. If your original loan is an FHA loan, you might be able to qualify for a streamline refinance.
Unfortunately, Home Affordable Refinancing Program (HARP) loans were sunset in 2018, and Fannie Mae’s High Loan-to-Value (LTV) program has been suspended.
3. Consider a short sale
You might also take the short-sale route to avoid foreclosure and move to a more affordable housing situation, says McClary.
In a short sale, the lender must agree to accept less than the amount owed on the mortgage, making it a loss for them, says Lott. Lenders will only consider a short sale as a final option before foreclosure.
4. Walk away from your mortgage
Another option is to simply walk away from the mortgage — a move called a “strategic default” — but, like a short sale or foreclosure, doing so can be damaging to your future homeownership prospects and credit score. In short, this option also puts you in a precarious financial situation. If you walk away, your lender could even hold you liable for repaying the debt.
Homeowners should obtain advice from a HUD-approved nonprofit housing counseling agency in these situations to “help identify solutions specific to your circumstances and community,” says McClary. There might be a way to resolve your situation besides walking away, which is really a last resort.
5. Let the lender foreclose
Finally, you could allow your home to go into foreclosure. During this process, the lender regains the home and the homeowner walks away with their debt wiped clean, but a credit score that is rather tarnished. Many people in foreclosure also file for bankruptcy to eliminate other debts.
There are long-lasting repercussions for these options, says Lott. A bankruptcy and foreclosure can stay on your credit report for 10 years, and, like the other options, limit your ability to buy another home for several years.
Learn how to avoid foreclosure to find another way out of your situation. You could qualify for underwater loan relief and be able to keep your home.
Underwater mortgage FAQ
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You can help avoid an underwater mortgage by paying close or as close to the home’s appraised value as possible, and by making a higher down payment so you don’t have to take out as big of a loan. You should also plan to buy a home that you intend to stay in for several years. Sometimes, mortgages become underwater due to a widespread decline in property values, which you can’t prevent or avoid.
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Simply being underwater on your mortgage won’t impact your credit score. However, if you walk away from the loan (that is, stop paying), short-sell or accept foreclosure, your credit score will take a major hit.
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If you decide to stay in your home, you might have to wait a few months or many years for the market to improve. If the underwater mortgage eventually leads to foreclosure, those negative marks on your credit report can last for up to 10 years. (A short sale also hurts your credit, but not as much as a foreclosure does.)
Additional reporting by Taylor Freitas
When Chloé Daniels was 28 years old in 2019, she made the biggest financial mistake of her life. She gave her then-boyfriend roughly $30,000 in just over a year as “an investment” in his business of flipping houses in the Chicago area.
“It was my entire life savings at the time,” says Daniels, now 32. “I didn’t even have an emergency fund. And every time I had money, I would re-invest. I just kept funneling more money into it.”
When the pandemic hit, the house flipping operation fell apart. Labor costs ballooned. Lumber prices skyrocketed. It wasn’t long before the relationship fell apart, too.
Daniels soon realized she was never going to get her initial $30,000 investment back. To this day, she says she’s never recouped the money.
“I didn’t know anything about investing then,” says Daniels.
The experience spurred Daniels to learn the best practices of investing and personal finance, knowledge she parlayed into her current role as a full-time financial educator at her company Clo Bare Money Coach.
“After picking the riskiest investment I could have ever made, I don’t want to risk my money like that,” says Daniels.
Since 2021, Daniels has attracted a legion of mostly Gen Z and millennial followers on social media by teaching people “how to invest the lazy way.” Her content, courses and webinars focus on learning how to automate savings and create simple portfolios with low-cost funds.
Instead of betting on hot stocks, buying gold or yes even investing in super risky private money lending deals, Daniels emphasizes a set-it-and-forget-it approach to building wealth. She’s created dozens of videos explaining the perks of Roth IRAs and the historically positive long-term returns of buying index funds.
“My approach is still aggressive – most of my portfolio is all in stocks — but it’s a more tried-and-true approach to investing,” she says.
Her current philosophy that index funds are best for most investors— an idea touted by investing legend Warren Buffet as well as a growing number of financial influencers — is a stark departure from the dicey gamble with her ex’s real estate venture.
As Daniels notes in an April 2023 video: “The lazy way I’m investing is way simpler, way less risky and incredibly easy.”
Daniels’ ‘lazy’ investing strategy explained
Daniels is a strong believer in using tax-advantaged retirement accounts like 401(k)s and individual retirement accounts (IRAs) to build simple portfolios with a handful of inexpensive index funds.
An index fund serves as a collection of stocks, offering investors instant diversification with the purchase of a single share. Take the S&P 500, for example, which tracks the 500 best performing companies in the U.S. By purchasing an S&P 500 index fund, you acquire fractional ownership in all the companies the index tracks, from Apple and Microsoft to Coca-Cola and Disney.
You can buy low-cost index funds as either an exchange-traded fund (ETF) or a mutual fund. Both function very similarly, though some 401(k) plan platforms only allow you to purchase mutual funds, while ETFs are generally available at all brokers that allow stock trading.
Index funds are considered less risky than picking individual stocks, since your money is spread over hundreds of companies instead of just one or two. Most are also cheap, with the best index funds featuring expense ratios of less than 0.03 percent, or $3 for every $10,000 invested.
Daniels began her investing journey in earnest by maxing out her 401(k) retirement plan in 2020 while working full-time as a communications specialist at an engineering firm. She contributed about 25 percent of her six-figure salary to the account and earned a company match, which is essentially free money.
She’s expanded her investment accounts since then, adding a Roth IRA, traditional IRA, solo 401(k), a taxable brokerage and even investing the funds within her health savings account. In March 2024, her net worth was $296,000, according to documents reviewed by Bankrate.
But she’s used the same low-cost passively managed funds to build wealth across all her accounts.
Here are the main funds Daniels uses in her investment accounts:
- QQQ: Invesco QQQ Trust (Nasdaq)
- VTSAX: Vanguard Total Stock Market Index Fund
- VOO: Vanguard S&P 500 ETF
- VOOG: Vanguard S&P 500 Growth Index Fund ETF
- VOOV: Vanguard S&P 500 Value Index Fund ETF
- VIMAX: Vanguard Mid-Cap Index Fund
- VIOG: Vanguard S&P Small-Cap 600 Growth Index Fund ETF
Putting investing on auto-pilot
Daniels not only keeps her portfolio simple, she also puts her contributions on auto-pilot.
By transferring a percentage of her earnings directly to her investment accounts each month, she’s practicing dollar-cost averaging, a strategy where you invest a fixed amount of money at regular intervals. This helps buy more shares when prices are low and fewer when prices are high, smoothing out the impact of market turbulence without trying to time the market — a notoriously difficult task.
“If the guys on Wall Street – who not only have more education but also more access to information — can’t consistently time the market correctly, then I’m not going to,” Daniels says.
If consistently buying index funds sounds super boring, that’s the whole point.
“We have movies like ‘Wolf of Wall Street’ or ‘Dumb Money’ that make us think investing is like gambling, it’s day trading, it’s super risky,” says Daniels. “There’s not a single movie out there about index funds because it’s not exciting. It’s very boring.
“‘Oh, index funds are doing fine again’ doesn’t exactly make for exciting headlines,” adds Daniels.
Investing over paying off low-interest student loan debt
While the idea of consistently buying cheap index funds isn’t new, Daniels holds a somewhat unconventional attitude toward investing and paying off debt.
Unlike some voices in the world of personal finance, Daniels says there are more important things than being entirely debt-free as quickly as possible.
It’s a stance in stark contrast to influencers like radio host Dave Ramsey, who built a multi-million dollar financial education empire on the premise that people should eliminate all debt before ever putting money in the stock market.
“That’s an insane idea,” Daniels says. “There’s so much in between ‘be debt-free’ and ‘only invest.’ I think you should be doing both.”
Daniels believes paying off high-interest credit card debt is essential, but as she points out, most millennials and Gen Zers are saddled with tens of thousands of dollars in low-interest student loan debt.
She thinks it often makes more sense to make a small or minimum payment on student loan debt — so long as the interest rate is below about 5 to 8 percent — while investing at the same time.
Putting extra cash in the market instead — especially in your 20s and 30s when the power of compounding interest is really on your side— can yield better returns over time, Daniels says, even when accounting for interest charges.
That’s because the stock market has historically earned average returns of 8 percent or more, while low-interest student loan debt may only charge an interest rate of 4 percent or less. It’s not costing you much to hold that debt, but you miss out on the potential growth of investing at least a portion of your money.
“When you run different scenarios, you can see if it makes sense to decide if you want to pay off your debt early, do I want to do a combination of both or do I just want to (make the minimum payments) and be investing,” Daniels says.
Daniels acknowledges she didn’t follow this approach in her late 20s, when she paid off almost $40,000 in student loans in two years. She refers to it as her “debt-free mistake” and her other biggest financial regret.
“I’ve done the calculations, and that’s cost me about $1 million long term,” says Daniels. “Yes, I saved about $18,000 in interest by paying off that much debt when I did. But I don’t think anyone would really choose to save $18,000 in interest over making $1 million over time.”
Daniels still carries about $10,000 in student loan debt at a 3.5 percent interest rate. She plans on making the minimum payment until the debt is eventually paid off.
Quitting her 9-5 to to run Clo-Bare full time
In October 2021, Daniels left her job as a communications specialist to pursue Clo Bare Money Coach full time.
In addition to posting daily content about saving and investing on Instagram and Tik-Tok (where she now has over 120,000 followers on each), Daniels offered 1-on-1 financial coaching. She earned about $5,000 a month in the six months leading up to quitting her 9-5 job.
But after devoting all her time to her growing business, Daniels says the profits really started rolling in.
By December, Daniels debuted her Lazy Investor’s Course where 91 people signed up to get access for $379 each — a nearly $35,000 launch. Just over two years later, the self-paced Lazy Investor’s Course retails for $997.
What began as blogging part-time about her personal experiences saving and budgeting money back in 2018 has transformed into a six-figure full-time career managing an education platform built around her personal brand.
“I knew I would regret it if I didn’t try it,” she says.
Daniels is always quick to point out that she’s not a certified financial planner, or licensed to provide specific investment advice. She’s offering educational resources and sharing both the wins and failures she’s experienced along her journey.
Different aspects of that journey really resonate with people, especially other women in their late 20s and 30s. Whether it’s struggling to decide whether to pay off student loans or invest, or escaping a financially abusive relationship, her videos are filled with comments like “Oh man, I can relate” and “Definitely been there, and then some.”
Instead of downplaying her mistakes, Daniels has made a small fortune embracing them and using them as examples to teach others about how to be smarter with their money. Her nobody’s-perfect approach works, and it’s helping thousands of people learn about investing.
“Over and over again, my students say they chose me because they saw themselves in me,” she says. “And the fact I tell people they can get rewarded for being lazy with investing — I think that really resonates too.”
The Federal Reserve has once again hit the pause button in its war on inflation. After raising rates 11 times in 2022 and 2023, the central bank has been standing pat. Following the Fed’s March 20 meeting, its second of 2024, Chairman Jerome Powell held steady again, announcing no change in interest rates for the time being.
The Federal Reserve and the housing market
Earlier in the inflationary cycle, the Fed had enacted increases of as much as three-quarters of a point. Now that inflation is down to 3.2 percent — not too far off from its official target of 2 percent — that round of tightening appears to be over. Housing economists are now looking to when the anticipated rate cuts will begin.
“Additional rate hikes no longer appear to be part of the conversation — it is all about the pace of cuts from here,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association. “This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market.”
In an effort to rein in inflation, the Fed boosted interest rates aggressively in 2022 and 2023, including a single jump of three-quarters of a percentage point. The hikes aimed to cool an economy that was on fire after rebounding from the coronavirus recession of 2020. That dramatic recovery has included a red-hot housing market characterized by record-high home prices and microscopic levels of inventory.
However, for months now the housing market has shown signs of cooling. Home sales have dropped sharply, and appreciation slowed nationally. Home prices are not driven solely by interest rates but by a complicated mix of factors — so it’s hard to predict exactly how the Fed’s efforts will affect the housing market.
Higher rates are challenging for both homebuyers, who have to cope with steeper monthly payments, and sellers, who experience less demand and lower offers for their homes. After hitting 8 percent last fall, mortgage rates have dipped back down a bit. As of March 20, the average 30-year rate stood at 7.07 percent, according to Bankrate’s national survey of lenders — certainly a welcome turnaround.
How the Fed affects mortgage rates
The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t move mortgages as directly as they do other products, such as savings accounts and CD rates. Instead, mortgage rates tend to move in lockstep with 10-year Treasury yields.
A slowing economy and an easing of inflation pressures are the prerequisites for lower mortgage rates.
— Greg McBride, Bankrate Chief Financial Analyst
“Mortgage rates don’t take direct cues from the Fed and will instead respond to the outlook for the economy and inflation,” says Bankrate chief financial analyst Greg McBride. “A slowing economy and an easing of inflation pressures are the prerequisites for lower mortgage rates.”
Still, the Fed’s policies set the overall tone for mortgage rates. Lenders and investors closely watch the central bank, and the mortgage market’s attempts to interpret the Fed’s actions affect how much you pay for your home loan. The Fed bumped rates seven times in 2022, a year that saw mortgage rates jump from 3.4 percent in January all the way to 7.12 percent in October. “Such increases diminish purchase affordability, making it even harder for lower-income and first-time buyers to purchase a home,” says Clare Losey, an economist at the Austin Board of Realtors in Texas.
What will happen to the housing market if interest rates rise?
There’s no doubt that record-low mortgage rates helped fuel the housing boom of 2020 and 2021. Some think it was the single most important factor in pushing the residential real estate market into overdrive.
When mortgage rates surged higher than they had been in two decades, the housing market slowed dramatically. And now, while sales volume remains slow, prices are volatile: Home prices declined for seven straight months through January 2023, then rose for nine straight months before finally starting to tick back down again in November, according to the Case-Shiller U.S. National Home Price NSA Index. They’re now rising again: the nationwide median existing-home price for January, normally a very slow month for real estate, was $379,100, according to the National Association of Realtors — up more than 5 percent year-over-year and surprisingly close to NAR’s all-time-high median price of $413,800.
Yet, in the long term, home prices and home sales tend to be resilient to rising mortgage rates, housing economists say. That’s because individual life events that prompt a home purchase — the birth of a child, marriage, a job change — don’t always correspond conveniently with mortgage rate cycles.
History bears this out. In the 1980s, mortgage rates soared as high as 18 percent, yet Americans still bought homes. In the 1990s, rates of 8 percent to 9 percent were common, and Americans continued snapping up homes. During the housing bubble of 2004 to 2007, mortgage rates were high, yet prices soared.
So the current slowdown may be more of an overheated market’s return to normalcy rather than the signal of an incipient housing crash. “The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” Fratantoni says.
But if mortgage rates keep pulling back, affordability will become less of a factor. For instance, borrowing $320,000 at the mid-March rate of 6.84 percent translates to a monthly principal-and-interest payment of $2,094, according to Bankrate’s mortgage calculator. Borrowing the same amount at 8 percent translates to a monthly payment of $2,348. That’s a difference of more than $250 per month, or just over $3,000 a year.
A continued decline in mortgage rates could create a new challenge, though: It will likely draw new buyers into the market, a surge that could further intensify the ongoing shortage of homes for sale.
Next steps for borrowers
Here are some pro tips for dealing with elevated mortgage rates:
- Shop around for a mortgage. Savvy shopping can help you find a better-than-average rate. With the refinance boom considerably slowed, lenders are eager for your business. “Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” McBride says.
- Be cautious about ARMs. Adjustable-rate mortgages may look tempting, but McBride says borrowers should steer clear. “Don’t fall into the trap of using an adjustable-rate mortgage as a crutch of affordability,” he says. “There is little in the way of up-front savings, an average of just one-half percentage point for the first five years, but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.”
- Consider a home equity loan or HELOC. While mortgage refinancing is on the wane, many homeowners are turning to home equity lines of credit (HELOCs) to tap into their home equity. The rationale is simple: If you need $50,000 for a kitchen renovation and you have a mortgage for $300,000 at 3 percent, you probably don’t want to take out a new loan at 7 percent. Better to keep the 3 percent rate on the mortgage and take a HELOC — even if it costs 10 percent.
You finally own your home free and clear. And now, you want to put that ownership stake to use. Is this even possible?
Fortunately, the answer is yes. You can take equity out of your home even after your mortgage is paid off. One of the easier ways to do so is to sell your home, but there are also financial products that allow you to extract equity from your paid-off home quickly without having to pick up and move.
Each has its pluses and minuses. So let’s look at the options.
Can you take equity out of a paid-off house?
“It is definitely possible to take equity out of your home after you’ve paid off a previous mortgage,” says Jeffrey Brown, branch manager with Axia Home Loans in Bellevue, Wash. “Assuming you qualify, you can access that equity at any time.”
Actually, those means of access are pretty much the same for a paid-off house as for one that still has a mortgage on it. You can take equity out of your home using one of these tools:
- home equity loan
- home equity line of credit (HELOC)
- reverse mortgage
- cash-out refinance
- shared equity investment
When should you tap equity on a paid-off house?
Why would anyone pursue fresh financing after finally paying off a mortgage? Well, why not? Your home is an asset, and you can make it work for you. And when you own it free and clear, its tappable potential is at its greatest (see Pros, below).
Viable reasons abound for borrowing against your ownership stake, from funding a major home improvement project to investing in a business to purchasing more property. Or, frankly, for whatever you need. However, since your home will serve as the collateral for the debt, you should be judicious in how you tap it. Two good rules to follow: Use your equity in ways that improve your finances or work as an investment and don’t take out more than you can afford to lose.
How to get equity out of a paid-off house
Cash-out refinance on a paid-off home
Let’s say you were still paying off your mortgage, had adequate equity and needed cash. You’d likely do a cash-out refinance, which typically has a relatively lower interest rate compared to other types of loans.
You can do the same now, even though you’ve paid off your mortgage. You’ll simply take out a new mortgage and pocket the equity in the form of cash at closing. As with any refinance, however, you’ll be on the hook for closing costs, which can run 2 percent to 5 percent of the amount you’re borrowing and any escrow payments.
“A cash-out refinance generally results in the lowest interest rate and offers the highest loan amounts you can borrow,” says Matt Hackett, operations manager for Equity Now, a mortgage lender headquartered in Mamaroneck, New York. “It can be a fixed- or adjustable-rate loan, and it is fairly straightforward to apply and qualify for.”
Home equity loan on a paid-off home
Alternatively, you could apply for a house-paid-off home equity loan.
Like a cash-out refinance, a home equity loan is secured by your property (the collateral for the loan) and enables you to extract a large amount of equity because you have no other debt attached to the residence. You’ll also likely need to pay closing costs, and as with any mortgage, you risk losing your home if you can’t pay it back.
The upsides: Home equity loans typically come with fixed interest rates, which are usually much lower than personal loan rates. Plus, if you use the money on home improvements, you can deduct the interest on your taxes.
HELOC on a paid-off home
Many homeowners like the flexibility of a home equity line of credit (HELOC), which works more like a credit card you can use when you need it.
“HELOCs come with adjustable interest rates, often based on the prime rate,” says Hackett. “They offer the opportunity to draw funds and pay back funds during the initial draw period, which is more flexible than a standard first mortgage.”
What’s more, you’re only responsible for repaying the amount you use versus the fixed obligation of a cash-out refinance or home equity loan, says Vikram Gupta, executive vice president and head of home equity for PNC Bank.
Do read the fine print of your agreement, though. “Additionally, some HELOCs may have various fees associated with them such as annual fees, early closure fees, and origination fees, so borrowers should pay close attention to these when evaluating their total financing costs,” says Gupta.
On the downside: HELOCs aren’t as easily attainable — you need a strong credit score — and, given their fluctuating interest rates, can mean variable monthly repayments.
Reverse mortgage on a paid-off home
If you’re 62 or older, you could be eligible for a reverse mortgage. This financing vehicle gets you regular payments from a mortgage lender in exchange for your home’s equity.
“A reverse mortgage can be a great way for seniors to access the equity in their homes to pay for monthly living expenses and keep them living independently, especially if they don’t have monthly income in retirement,” says Brown.
Reverse mortgages have pros and cons, though. You’ll still need to keep up with homeowners insurance, property tax and HOA dues payments to avoid foreclosure, and there’s a limit to how much money you can get. You can’t let the home fall into disrepair either — you’ll still be responsible for maintenance.
Most of all: “It’s important for the borrower’s survivors to understand that the entire [reverse mortgage] balance, plus interest and fees, is due if the borrower passes away,” says Gupta. “The borrower’s house may need to be sold if their estate cannot repay the reverse mortgage loan.”
Shared equity agreement on a paid-off home
With a shared equity agreement — a relatively new method of liquidating equity — you’ll sell a portion of your future home equity in exchange for a one-time cash payment.
“The details on how this works and what it costs will vary from investor to investor,” says Andrew Latham, CFP, CPFC, content director and managing editor for SuperMoney.com. “Let’s say you have a property worth $600,000 with $200,000 in equity built up. A home equity investor might offer you $100,000 for a 25 percent share in the appreciation of your home.”
If your home’s value increases to $1 million after 10 years — the typical term for a home equity investment — you’d have to return the $100,000 investment plus 25 percent of the appreciation, which in this case would be $100,000. You’d also need to return the investment plus the share of appreciation if you sell the home.
“The advantage here is that you can tap into your home’s equity without getting into debt,” says Latham, “and there are no monthly payments, which is a great plus for homeowners struggling with cash flow.”
In effect, you’ll have a silent partner in your home, so you’ll need to be comfortable with that and the rights that partner has to protect their investment.
Pros of tapping equity on a paid-off house
Easier to get approved
On the plus side, it can be relatively easy to qualify for a home equity loan on a paid-off house since you already have a solid track record of paying off your first mortgage, which likely means you’re older and have good credit and possibly a higher income. This ups your creditworthiness as a borrower, making you a preferred candidate to lenders and lowering the interest rate you’ll pay.
You also won’t have to worry about the size of your ownership stake or loan-to-value ratio — two other criteria that lenders look at, and that affect how much you’re able to borrow.
No-strings money
Furthermore, you can use your equity for any reason. Most lenders won’t care, for instance, if the money will be put toward funding retirement, seeding a new business or making a down payment on an investment property.
“Many seek to pay for their children’s educational expenses, fund their retirement or pay for an unexpected medical emergency like cancer care for a loved one,” says Kelly McCann, an attorney specializing in construction and real estate with Burnside Law Group in Portland, Ore.
Avoid capital gains taxes
In addition to being able to use the money for nearly any purpose and being more likely to qualify, tapping into your home equity also has the potential to save you money on your income tax.
“It may be smarter to tap into your equity than selling your home and downsizing,” says McCann. “If you have capital gains on your home of more than $250,000 (or more than $500,000 if you are a married couple) you must pay taxes on that gain after the sale of your home. However, if you borrow against your home by, for example, taking out a home equity loan, you don’t have to pay taxes on the loan proceeds — you get the money tax-free.”
Cons of tapping equity on a paid-off house
Risk of losing your home
Of course, if you choose a form of financing wherein your home is used as collateral, like a cash-out refinance or home equity loan, there’s always the risk that you could lose your home if you can’t repay.
Upfront expenses
While they often carry lower interest rates than unsecured loans, home equity products aren’t free. Most have upfront expenses and many of those good old closing costs that you remember all-too-well from your first mortgage. You’ll have to come up with the funds to pay for expenses like origination fees and a home appraisal, to name a few. The whole process could be paperwork-heavy and time-consuming, too.
Being frivolous with funds
You’ve got a tempting chunk of change there in your home. But you’ve worked long and hard to acquire this asset, so don’t blow it on one-time, discretionary expenses. Buying a car (a depreciating asset), paying for a wedding or taking a vacation — these are not-so-good reasons to deplete your equity stake.
How much equity am I able to cash out of my home if it’s fully paid off?
Even if your home mortgage has been paid in full, which means you have 100 percent equity, you cannot borrow all of that money. Generally, lenders allow for borrowing up to 80 to 85 percent of a home’s appraised value. That means if your home is worth $500,000 you may be able to access as much as $425,000 of that equity. However, the specific limit also varies by lender.
Bottom line on getting equity out of a paid-off home
Determining whether it makes sense to pull equity out of a house you’ve already paid off really comes down to your unique circumstances and financial picture, as well as your short- and long-term goals. It’s also important to consider whether you’d be able to make the payments on the loan if your financial circumstances were to change unexpectedly.
“Homeowners should ask themselves: ‘What is the purpose of the funds needed?’ They also need to assess their individual financial situations to ensure they have the cash flow to pay off the loan in the future, particularly as they approach retirement,” says Gupta.
If you decide to proceed, make sure to practice the due diligence you would apply to any other financial transaction—shop around with several lenders and find the best terms for your needs.
FAQs
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A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home’s equity. When opening a HELOC, you only pay interest on the money you actually use. As an added bonus, when using a HELOC, you won’t pay all the closing costs that come with a home equity loan or a cash-out refinance on a paid off home.
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Lenders typically look for credit scores of at least 620 on home equity loan applications. You’ll qualify for an even better rate with a score of 700 or above.
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Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
- A lien is a legal claim on a property by an individual or entity that the owner owes money to.
- There are two types of liens: voluntary and involuntary. Voluntary liens are ones that you knowingly agreed to, such as a mortgage, while involuntary liens are placed on your property by creditors or courts.
- A mortgage lien would not prevent you from selling, but involuntary liens on a property can cause issues.
Selling a home is complicated, and a home with a lien on it can complicate the transaction even further. Liens on homes are actually very common, and they don’t necessarily keep you from selling. But certain types are more — or less — problematic than others. Here’s what to know about selling a house with a lien on it.
What is a lien?
A lien on your home is a legal claim to your property by an individual or entity you’re indebted to. Liens are commonly used in collateralized debt arrangements. If you default on your mortgage and the lender forecloses, any party with a lien on the property might be entitled to some of the sale proceeds as a means of repayment.
There are two basic kinds of property liens, and one is far more worrisome than the other: voluntary and involuntary. As the name implies, a voluntary lien is one you sign up for — a good example is your mortgage, which is technically a lien but one you knowingly secured. An involuntary lien, however, is typically placed in scenarios where you owe money, and the entity who is owed, whether it’s a contractor or a tax collector, is attempting to collect what is legally owed to them.
Types of property liens
Various entities can legally place a lien on your home if you owe them money. This could be government agencies due to unpaid property taxes, credit card companies, other lenders for unsettled debts like medical bills or personal loans or contractors for non-payment of their services. Here are the kinds to know about:
- Mortgage: A bank or mortgage lender places a lien on any property they authorize a mortgage for. This is a voluntary lien — the homeowner owes them money due to the mortgage loan, but it’s not an indication of delinquency or wrongdoing.
- Tax lien: If you fail to pay taxes (including local property taxes), the government can put a lien on your home. This is an involuntary lien.
- General judgment lien: Another involuntary version — a creditor can choose to file for a judgment lien in court if you fail to pay what you owe them.
- Contractor’s lien: Also called a mechanic’s lien, this is another involuntary form. A construction company, contractor or builder can file a contractor’s lien if you fail to pay them for work they performed.
Can you sell a house with a lien on it?
The short answer is yes. Especially if it’s voluntary: Selling a home with a mortgage on it, for example, is very common. That’s because you’ll (ideally) be able to use the proceeds from the sale to pay off your loan balance and satisfy that debt.
The issues arise when it’s an involuntary lien. Tax liens will almost certainly have to be paid off before the home can be sold. In some cases, the buyer might agree to help: It’s possible to sell a home with a judgment lien, for example, but if you can’t resolve the lien yourself, your buyer would have to agree to pay it. This isn’t common, but it does happen with certain types of sales, such as homes sold through foreclosure auction. You can also take legal action to have the lien dismissed, though this option might prove too expensive if you already owe more money than you can pay back.
At the end of the day, it’s simplest to avoid selling your home if it has an involuntary lien, if possible. Wait to sell until you can clear things up — or, if you need or want to try anyway, it’s smart to have guidance from an experienced real estate attorney.
How do I find out if there are any liens against my property?
If the property is your primary residence, it’s unlikely to have any liens against it that you don’t know about. However, there are several routes you can take to check:
- Government records: You could examine local government records via your county recorder or assessor, or at the local courthouse. Bear in mind that this might require paying a fee.
- Credit report: Check your credit report — these often list liens in the public records section.
- Title search: Employing the services of a title search company is the most comprehensive method, but it’s also likely to be the most costly. These firms offer a full rundown of your property’s title history and pinpoint any burdens, ensuring any liens are identified before selling or transferring the property. A title search is a standard step in any real estate transaction.
FAQs
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A voluntary lien, such as your mortgage, isn’t considered bad, so long as you continue to repay it on schedule. Involuntary liens on a home, though, can present a serious challenge if you want to sell the property. To avoid headaches, involuntary liens like contractor’s, judgment and tax liens should be resolved as soon as possible.
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In some cases, liens do expire. The laws are complex and differ in each state, though. A real estate lawyer can help you determine if any liens on your home have expired.
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While it’s possible to sell your home with an involuntary lien on it, the buyer would need to agree upfront to take on, and pay back, the debt. In most home sales, a title search is performed, which would reveal any liens on the property — if the buyer does not find out there’s an involuntary lien on the home until this point, then yes, it might cause the sale to fall through.
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You can prevent an involuntary lien on your home by paying what you owe. For example, you could have a lien placed on your home for failing to pay property taxes or someone who did renovations — if these debts are paid in full, or according to an agreed-upon schedule, that prevents a lien from being put in place.
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Whether you’re downsizing in the same town, retiring to the Jersey shore or planning to leave the Garden State for somewhere new, it’s a good time to sell a home in New Jersey. Data from New Jersey Realtors shows that the median sale price of a single-family home here in January was $505,000 — a healthy 12.2 percent increase over last year and well above the nationwide median — and that homes typically sold for 1.2 percent above their list price.
However, all that success takes time: Homes typically sat on the market for more than a month before finally going into contract. If you’re hoping to sell your house in New Jersey fast, or at least faster than that, read on.
How fast can you sell your home in New Jersey?
As of January, New Jersey homes spent about 42 days on the market before selling, according to Redfin data. But that’s just the time it took to go into contract — afterward, you’d have to wait even longer for your buyer’s mortgage to be approved before you could close. Things tend to move quicker in the summer, though, which is typically the best time to sell a house in New Jersey (and most other states, too). For example, Redfin’s data shows that homes spent just 31 days on the market in July and August.
Need to sell even faster?
If you can’t afford to be patient, there are ways to accelerate the process. Keep in mind, though, that time really is money in this situation — selling faster often means selling for a lower price. Look into these options if time is of the essence:
- Cash homebuyers: Compare companies that buy houses for cash in New Jersey, which range from national franchises to small local operations. These companies move with remarkable speed, typically closing the entire deal within just a few weeks or even less. And they usually buy homes as-is, making them a good option if the home is in poor condition. However, these outfits will likely offer a lower price than you could get on the open market.
- iBuyers: Similarly, offers from iBuyers will likely be lower than selling the traditional way. But the speed and convenience can be worth it if you need to move really fast. Opendoor, one of the industry’s biggest players, buys homes in northern New Jersey.
- Real estate agents: You can still sell faster if you use an agent — you just need to be upfront with them about your need for speed. A skilled agent who knows your corner of the New Jersey market well will be able to price your home to move, and knows when to make concessions or other ways to be flexible in order to keep things moving at a good pace.
Selling your home fast for fair market value
Hiring an experienced local real estate agent, while not as fast as a cash-homebuying company, is the best way to maximize the profits from your home sale. These licensed professionals know the ins and outs of selling a home in the Garden State and can advise you on pricing, marketing, negotiating and more.
Here are some other things to consider before putting your home up for sale.
- How should you price your listing? Your real estate agent can help you with the most important decision of selling a home: setting the asking price. How much is your house worth? Your agent will look at neighborhood comps to figure out your home’s market value and price it appropriately.
- Is it worth upgrading before you sell? Probably not — most major home renovations do not recoup their full value when it’s time to sell. Plus, hiring a contractor and dealing with ongoing supply-chain delays can take significantly longer than you expect. Rather than thinking about big upgrades, it’s smart to consider quick improvements that can boost the value of your home without breaking the bank.
- What should you repair before selling? You’ll probably want to address anything obvious that a prospective buyer might notice. Consider any issues that have annoyed you as an owner — a perpetually leaky faucet or a cracked floorboard, for example. You might also consider getting a pre-listing inspection, which can help you get in front of any problems that the buyer’s inspection might uncover.
- Should you pay to stage your home? Will a house-hunter be able to picture themselves living in the home, or is it full of personal items and quirks that make it obviously yours? Talk to your agent about whether it might be worth paying a pro to stage your home. Think of it as a professional makeover that provides a move-in-ready look to appeal to buyers.
- Should you sell as-is? If you opt to list your New Jersey home in as-is condition, you are broadcasting a simple message to buyers: You won’t be making any repairs. This can move the process along much more quickly, as you avoid back-and-forth negotiations about what needs fixing and what doesn’t, but it can also turn buyers off, so consult your agent.
- What do you need to disclose to the buyer? Every home seller in New Jersey needs to fill out a property condition disclosure statement, which details any potential defects with the home. From the age of the HVAC system to past termite damage, this document covers just about everything a buyer should know. Additionally, if your home is part of a homeowners association, be prepared to hand over documents about the association’s bylaws and financial health.
Closing day
Even if you stand to make a nice profit, selling a house costs money. If you’re still paying off a mortgage on your house in New Jersey, part of the proceeds from the sale will immediately go to settle up that debt. Then, you will need to pay the real estate agents’ commissions, which typically total 5 to 6 percent of the home’s sale price. So, if you sell your place for the median price of $505,000, you will pay up to $30,000 in Realtor fees.
You’ll also have to factor in closing costs in New Jersey. These may include:
- Transfer taxes: New Jersey sellers pay a 1 percent real estate transfer tax, a fee to switch ownership of the property to the buyer. So, if you sell your place for $500,000, you will need to give the state $5,000.
- Seller concessions: The buyer may request concessions during the negotiation process, for example asking you to cover the cost of a needed repair. It’s up to you whether you are willing to budge here, but this is very common and often helps move the sale along more quickly.
- Attorney fees: New Jersey does not legally require sellers to hire a lawyer, but a real estate attorney’s expertise is still worth paying for. Real estate contracts are complicated, and there’s a lot of money at stake, so you want to make sure your interests are protected.
- Capital gains tax: If your home’s value has risen significantly, you might be taxed on the profit when you sell it. It all depends on your marital and tax status, how long you owned the home, whether it was your primary residence and the exact amount of net profits — it’s best to consult a tax professional here.
- Title insurance: This cost often falls to the seller, but in New Jersey, sellers are in luck: The buyer typically pays for title insurance in this state.
Find a trusted real estate agent
You don’t have to figure it all out by yourself. An experienced local real estate agent can educate you on the trends that will impact your listing, determine your home’s fair market value and help you sell for the highest price possible. If you’re really in a rush to sell, it’s worth considering a cash-homebuyer or iBuyer as well.
FAQs
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As of January 2024, New Jersey homes spent around 42 days on the market before selling, according to Redfin data. Selling to a cash homebuyer or iBuyer can speed that timeline up significantly, but in exchange you will likely sacrifice some profits.
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Yes, an agent can help you sell your house quickly because they understand competitive pricing strategies and can market your home with speed in mind. However, if time is of the utmost importance, the fastest route is to sell to an iBuyer or cash homebuying company.
AleksandarNakic/ Getty Images; Illustration by Austin Courregé/Bankrate
Key takeaways
- Selling a home comes with a lot of documentation, most of which you’ll gather before listing the property on the market.
- One important document is the seller net sheet, which will detail your all-in costs and potential profit.
- Keep records of any major home improvements or repairs. This is not only helpful for the buyer, but also for your agent in pricing the home.
Selling a home is a complex process that requires a long list of documents from start to finish. From the initial listing agreement to mandatory disclosures, here are the key pieces of paperwork in the transaction.
Documents needed to sell a house
If you’re thinking of putting your home on the market, it can be helpful to understand the documents involved, some of which you can gather on your own and some of which will be provided by the professionals who facilitate the transaction. Here’s an overview of what you need to obtain, what you might see, and what you might need to sign during the transaction:
Pre-listing documents
Prior to listing your home for sale, track down the paperwork related to your ownership as well as any changes you made to the property while living there. This includes:
- Documents related to your purchase of the home: This will include the closing documents and a copy of the deed.
- Homeowners insurance policy documents: Keep a copy of your policy handy during the transaction, and be sure to maintain your coverage until the closing has taken place.
- HOA documents: If your home is in a homeowners association, gather up any documents related to the HOA, such as CC&Rs or due schedules to disclose to the buyer. The title company involved in the transaction will order a review of these and information like the HOA’s financials, as well.
- Major home improvement, maintenance and repair records: Aside from helping the buyer understand upkeep and any improvements to the home, these records can be used to more accurately price the home or dispute a low home appraisal.
- Manuals and warranties: This isn’t a requirement to sell your home, but it’s customary for the seller to provide the buyer manuals for the home’s major appliances and systems, plus any warranty documentation if the seller has one.
- Pre-listing inspection report: If you want to know what repairs a buyer might ask you to make, you can pay for a pre-listing home inspection. This report can help you prepare for these expenses, or even motivate you to make the repairs yourself before your home hits the market.
- Listing agreement: If working with a real estate agent to sell your home, you’re required to sign a listing contract. Here’s more on exclusive right to sell agreements.
- Comparative market analysis: “A licensed agent prepares a report of sold, pending and active listings in order to provide the seller with a sense of fair market value for their property,” says Tim Garrity, partner and broker of record at Copper Hill Real Estate in Philadelphia.
- Seller net sheet: Sometimes referred to as the seller’s estimated costs, this document breaks down all of the costs associated with selling a home, as well as what the seller stands to profit when all is said and done. “It provides the seller with a sense of what they could potentially walk away with,” says Garrity.
- Preliminary title check: Preliminary title searches help both the real estate agent and seller understand what’s owed on the property, as well as whether there are any issues impacting the title that could hold up the sale or reduce the home’s value. “Similar to CarFax for cars, a title search helps buyers and sellers understand more about a property before deciding to buy or sell,” says Garrity.
- Seller’s disclosures: This mandatory disclosure form provides information to buyers about any significant issues or defects related to the home. The requirements surrounding such disclosures vary by state.
- Mortgage payoff statement: The closing agent will request a mortgage payoff statement from your lender.
Listing documents
Once you list your home and receive offers, you’ll see the buyer’s proposed purchase agreement. This includes information regarding the method of payment (mortgage or cash), closing date and any contingencies, such as a financing or home inspection clause.
During this time, you’ll also receive the home appraisal report. If you had an appraisal done recently prior to listing, provide that documentation to the buyer, as well.
Closing documents
At the closing, you’ll work with the closing attorney or settlement agent to finalize the sale. You’ll see many documents, including an itemized closing statement of the closing costs and financials related to the deal, with any seller concessions you agreed to; the deed; and a proof of sale document.
FAQ
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Yes, you’ll need the deed to sell your home. But if you cannot locate this document, it’s possible to obtain a duplicate from your local recorder’s office.
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You’ll need a variety of documents in order to sell your home. Some of the most important include your mortgage loan documentation, mandatory disclosures and the deed.
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A proof of sale document is a record of the property’s transfer in ownership from the seller to the buyer.