Most home loans have a repayment period of either 15 or 30 years. So what happens if you want to sell before then or before you’ve paid off your loan? The typical seller lives in their home for 13 years before selling, according to the Zillow Group Consumer Housing Trends Report 2018, so selling while you still have a balance on your mortgage is actually quite common.
As long as your home is worth more than what you owe the bank, you’ll probably pocket some profit after you’re done paying commissions, fees and closing costs.
Steps to selling your house before the mortgage is paid off
Follow these three preliminary steps before selling a home with a mortgage.
Step 1: Contact your lender
First, ask your mortgage lender about your current mortgage payoff when selling a house. The quote you’ll receive is usually good for 10-30 days and may differ a bit from what you see on your monthly statement — it’s calculated with interest down to the day and can include fees you may be responsible for upon closing.
You’ll also want to check your loan documents to see if there’s a prepayment penalty, as that will affect how much money you pocket upon selling. A prepayment penalty is a fee you may have to pay if you sell before your loan is paid off. Prepayment penalties are less common than they once were, and some prepayment penalties only cover a specific period of time — say, if you sell within five years of buying. A prepayment penalty can be calculated a few different ways, varying by lender. It could be a percentage of your remaining loan balance (usually between 2-5 percent), a percentage of owed interest or a flat rate.
Note that your mortgage lender can’t tell you who you can or cannot sell to, but they are allowed to ask for a buyer’s pre-approval or proof of funds.
Step 2: Set a sale price
With help from your real estate agent, set a reasonable sale price for your home. Ideally, you’ll sell your home for an amount that covers your mortgage payoff, closing costs (including a 5-6 percent agent commission, taxes, attorney fees and transfer fees) and expenses you incur getting your home ready to sell.
At closing, you’ll get any profit that’s left, which will hopefully be enough to make a future investment or buy a new home.
Step 3: Get an estimated settlement statement
Make sure it makes financial sense to sell — meaning you’re going to turn enough of a profit that it’s worth all the commissions, closing costs and other expenses that come with selling a home. When you hire a real estate agent, one of the first things they’ll do is open an escrow account on your behalf (if you’re selling FSBO, you’ll take care of this step). Once your account is open, your escrow or title agent can provide a breakdown of your estimated closing costs. While the estimate can change based on the actual offer you get for your house and when you close, it will give you a more accurate picture of how much money you’ll walk away with.
How to sell a home that’s underwater
Most home sellers end up having positive equity in their homes. Nationally, less than 10% of homeowners have negative equity, which means they owe more on their home than it’s worth. It’s also known as “being underwater.”
Sellers often end up underwater by taking out a second mortgage to cover other expenses or debts. But when it’s time to sell, they have two mortgages to pay off, and the market has declined.
It’s not impossible to sell if you’re underwater, but you can face significant setbacks. Here are some options:
Delay the sale: If your situation allows it, stay in the home and keep paying your mortgage until market conditions improve. Alternatively, you could rent out the home until you regain equity and let your renters cover the mortgage in the meantime.
Pay out of pocket: It’s not ideal, but you could also pay the lender the difference in cash at closing. This is only feasible if you have the extra cash available and you can’t sell later when the market is better.
Request a short sale: If you need to move and owe more than your home is worth, you might consider a short sale. A short sale is when the lender agrees to reduce the balance you owe on the home to help you sell. Lenders are more likely to allow a short sale if they fear you’ll foreclose on the home, so you’ll have to prove hardship to get it approved.
Short sales are usually priced below market value to ensure a quick sale, and your lender may require an all-cash offer so they can get out of the investment as quickly as possible. In some instances, lenders will require a promissory note, which means you agree to keep making at least partial payments against the debt after the sale has closed. Note that if you sell your home with a short sale, it can negatively affect your credit score and limit your ability to buy another home in the near future.
Who is responsible for the mortgage payment while your house is selling?
You are the owner of the home until the day the sale closes, which means you’re responsible for your mortgage payments during this time. The average period of time between accepting an offer and closing on a home is 30-45 days, although buyers sometimes request shorter or longer closing periods. Occasionally (and depending on where your last mortgage payment before closing falls in relation to the closing date), your settlement statement might dictate that the final mortgage payment be paid at closing.
All of your questions related to which party pays for which expenses can be found in your settlement statement, which is also known as a closing statement. As the seller, your settlement statement will include an itemized list of fees and credits and detail your net profits.
Depending on which state you live in, your settlement statement will be prepared by an attorney, a title company or an escrow firm, and your actual closing appointment will be held at the office location of the person preparing your statement.
If you do owe a mortgage payment upon closing, it will be paid from the proceeds of your sale. No funds will actually pass through your hands. The title company will issue checks to all parties who are due money.
Timing your final mortgage payment
As mentioned above, sometimes your mortgage lender will lump your final mortgage payment into your closing, which means you won’t have to pay your normal monthly payment while your transaction is in escrow — instead, it will be accounted for at the closing table.
When reviewing your estimated settlement statement, be sure you know how your mortgage payment will be handled. If you accidentally skip a payment while your home sale is pending, you may be charged a late fee, and your credit score could be negatively impacted.
You’ll only be responsible for your mortgage through the day the home changes hands, so if your settlement statement says you are responsible for paying your mortgage normally during the escrow period, you’ll be refunded any overpayment upon closing.
What makes this complicated to calculate is that mortgage interest is paid in arrears (meaning your May interest payment pays for April’s interest), while your mortgage principal is paid in advance (meaning your May principal payment pays for May’s principal). So, depending on the time of month you close, you may be refunded for overpaid principal, but you may owe additional interest.
All in all, you’ll end up paying what you owe, down to the day, whether your final mortgage payment is made ahead of time or upon closing.
Is it better to pay off your mortgage before selling?
Paying off your mortgage early, before selling, might seem like a good way to avoid mortgage payment confusion, assuming you have enough cash. However, there’s limited benefit to paying the mortgage in full before selling. Yes, it would allow you to offer seller financing to a buyer, but it also may set you up to owe more at closing. Why? Because you could be subject to a prepayment penalty, depending on the terms of your loan.
Can you have two mortgages at once?
Buying and selling at the same time can be financially and logistically challenging. If you are still holding the first mortgage when you apply for a second, you may have too high a debt-to-income ratio to qualify for your new loan. It’s also common for people to need the cash from their home sale to put toward their new down payment, so that presents an additional challenge.
If you don’t have the debt-to-income ratio or cash availability to juggle both transactions at once, you may need to sell your previous home first and wait until the transaction clears before you buy again. Depending on the state of your local market, you may be able to put an offer on a new home that is contingent on the sale of your old home.
Can’t wait? Here are a few alternatives:
A bridge loan is a temporary loan that allows you to borrow your down payment for your new home while waiting for the proceeds from the sale of your old home to be available. You will still need to qualify for your new loan while owning the old home, and you’ll have to be able to afford the cost of two mortgages plus bridge loan interest for a short period of time.
In an assumable mortgage, the buyer takes over the seller’s existing mortgage. It’s an arrangement that is usually available for FHA or VA loans only. It requires lender approval, and usually there is no change in terms — meaning the buyer will assume your same interest rate and loan balance. This type of arrangement benefits the seller because you can market that you’re open to an assumable mortgage in your listing description. And in some cases, that gives your buyer access to a better interest rate than what’s currently available. It can also be a boon to negotiating — a buyer may be willing to pay more for the home if they can get a better interest rate that lowers their monthly payment.
However, assumable mortgages can be hard to facilitate, as the buyer often needs to have a good amount of cash to make it happen. For example, if you are selling your home for $300,000 and your remaining loan balance is $150,000, the buyer will assume your $150,000 mortgage but will need to bring an additional $150,000 to the table to arrive at the sale price.
How to minimize selling and buying overlap
The longer you’re floating two mortgages, the more it’ll cost you. To minimize overlap time, consider marketing your home to a cash buyer. They’re usually willing and able to close quickly, although you risk selling for less than market value — many cash buyers are investors looking to turn as much profit as they can.
Another option is selling through Zillow Offers. If your home qualifies, we’ll give you a no-obligation cash offer within days of submitting your request. You can close as quickly as seven days after accepting, and you’ll avoid expensive overlap time.
CAN YOU MAKE MONEY SELLING A HOUSE YOU STILL OWE ON?
When you’re selling a house before the mortgage is paid off, how much money (if any) you’ll make depends on how much you sell for, how much you owe on your existing mortgage and how much you’ll have to pay in transaction costs. The best thing you can do is estimate the financial outcome ahead of time.
The earlier you can get a good estimate on your potential profit (or loss), the more time you have to make a plan. If the current market value of your home won’t cover the costs to sell, it may not be the best time, so do the math and weigh your options.