Ever wondered how you can sell your house when you still have mortgage payments? Well, it's not only possible but it's more common than not nowadays. Last year, 78% of home buyers financed their home purchase -- with 30-year-fixed-rate mortgages still being the gold standard in the real estate market but a median tenure of 10 years for sellers -- it all checks out.
To sell a house with a mortgage, you will need to pay off the mortgage balance before you can transfer ownership of the property to the buyer. You can do this by using the proceeds from the sale to pay off the mortgage, or by finding a buyer who is willing to assume the mortgage. Here are the steps you can follow to sell a house with a mortgage.
Determine the Current Balance of Your Mortgage
First, you will need to know how much you owe on the mortgage in order to determine how much you will need to pay off at closing. Most diligent homeowners will have a ballpark understanding of their outstanding mortgage balance. However, you'll absolutely want to confirm it with your current mortgage lender. Due to interest rates, potential fees, and your payment schedule, the actual amount you owe (through the sale of your property) might be slightly higher than your remaining loan balance. The last thing you want when it comes time to put a down payment in your new house is to be caught off guard to learn you still owe money to the mortgage company.
Determine the Sale Price of Your House
Next, you will need to determine the sale price of your house based on the current market value and any improvements you have made to the property. Your real estate agent should perform a comparative market analysis to give you a clear picture of your current home's value.
Once you can project a sale price for your home, just deduct the mortgage balance (calculated in step 1) to understand how much equity you have in the property. Understanding home equity is crucial because this is how much you can make (at most) from the sale. Actually, you'll rarely take home this amount in full due to the closing costs associated with every real estate transaction. So be thorough when running these numbers with your agent.
Find a Buyer, Negotiate the Terms, and Close the Sale
Once your real estate agent has found a buyer, you will need to negotiate the terms of the sale, including the sale price and any contingencies that need to be completed before the sale can close.
While this is happening during the selling process, you should contact your mortgage lender and request a mortgage pay-off statement, which will show the exact payoff amount of your mortgage and any fees you will need to pay in order to settle up.
Once you have reached an agreement with the buyer and have received a mortgage pay-off statement, you can proceed to closing. At closing, you will pay off the mortgage and transfer ownership of the property to the buyer.
But What About...
While it's very common to sell with mortgage debt, there are a few considerations that can make navigating the process tricky.
Negative Equity: If the current value of your home is less than your outstanding mortgage balance, then you have what is called negative equity. Selling your home now (called a "short sale") is highly inadvisable. It's recommended you wait until your home value increases, you make more mortgage payments to lower the loan balance, or both. You want to have enough equity to make some money off from your sale proceeds in order to help with the down payment on your new home.
Home Equity Loan: If you have borrowed against your home equity, then you'll likely have to pay off both your mortgage and your HEL when you sell your property. This is another point to consider when you're calculating your home sale profit.
Taxes: Everyone's favorite topic is Uncle Sam's cut.What you will need to pay in property taxes, real estate taxes, and capital gains taxes depend on the nuances of your situation. Your agent can walk you through that when you discuss a fair listing price for your house.
Buying your nest house with a mortgage: If you're selling a home with an existing mortgage, then you'll likely require financing to buy your next home. Few lenders want to approve a potential buyer who will have two mortgages, as your DTI (debt-to-income ratio) will fall outside the bounds of their lending model. So you you'll need to plan the timing of your sale process accordingly. Otherwise, you may be required to buy PMI (private mortgage insurance) in order to get approved for a new home loan.
Conclusion
It's important to note that the process for selling a house with a mortgage can vary depending on your specific circumstances and the laws in your state. It's always a good idea to consult with a real estate attorney or a financial advisor to ensure that you understand your options and are making the best decisions for your situation.
If you understand what generally happens to your mortgage when sell, you're ready for the next step.
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