Can You Sell a House With a Mortgage? Here’s What You Need To Know!
Are you contemplating selling your house? Perhaps you need to relocate or are interested in a new home. If you’re selling a fully paid property, the process is less complicated, but having an unpaid mortgage is a different story.
If it’s your first time selling a house with a mortgage, it could feel overwhelming and even confusing. Will it get in the way of selling the house? Is the process much more difficult?
In this guide, you’ll learn everything about selling a house with an outstanding mortgage, including the step-by-step process, the costs involved, and the role of equity in this real estate transaction. Let’s get started!
Can You Sell a House With a Mortgage?
Often, the burning question of many homeowners is, “Can you sell a house with a mortgage?” And the short answer is yes, you can sell a house with an existing mortgage. It’s actually very common and you shouldn’t have any problem as long as you follow the necessary legal steps.
While it seems like a burden since a lender or bank has a claim on your property, it shouldn’t interfere with transferring the title to a new owner. Once you settle the outstanding loan balance after the sale, there will be no issue with the title transfer.
The lender usually approves the sale with the agreement that you will use the sale proceeds to pay off the remaining mortgage and other costs associated with the house selling.
Understanding Your Mortgage: Key Terms and Conditions
Before we get into the steps of selling a house with a mortgage, you might want to recall some key terms to help you throughout the process.
First, what is a mortgage?
A mortgage is a type of loan used to purchase a real estate property. A borrower can apply for a loan through their preferred lender, agreeing to pay them in increments over several years until it’s paid off. In this case, the house serves as collateral for the security of the lender.
Here are some key terms to remember:
- Principal: The principal refers to the original amount of money borrowed by an individual to buy a property. In general, the higher the principal, the higher the interest payments you need to fulfill.
- Interest: The interest is the amount charged by the lender over the entirety of the mortgage period. In theory, this reduces over time as the borrower pays the principal sum.
- Escrow: An escrow account or simply escrow is required by the lender to hold the earnest money deposit or upfront payment of the interested home buyer.
- Liens: A lien is the lender’s right of claim to the borrower’s property or collateral. This means if the borrower fails to meet the obligations of the loan, they are legally allowed to seize the property.
Types of Mortgages
Mortgages have different types depending on the interest rates. The most common ones are 30-year and 15-year fixed-rate mortgages. Stretching loan payments for more years reduces the monthly installment but increases the total interest paid over the agreed period.
Below are some of the most popular types of mortgage available for borrowers:
- Fixed-Rate Mortgage: Also called a traditional mortgage, this type of loan has a fixed interest rate, meaning that the monthly payment plus interest will stay the same for the entire mortgage term.
- Adjustable-Rate Mortgage (ARM): In ARM, the initial interest will be fixed for an initial term, allowing the borrower to pay lower monthly payments. After that period, the interest rate will change periodically depending on the rate of adjustment.
- Interest-Only Mortgage: Another type of mortgage is the interest-only loan wherein the borrower is only required to pay the interest for a specified time, typically five, seven, or 10 years. Then, the principal is either paid lump sum or recurring payments.
Prepayment Penalties
Mortgage agreements often contain terms that borrowers must adhere to. These terms can significantly affect the selling process. One significant aspect to consider is the prepayment penalty.
A prepayment penalty is a fee charged by the lender if the borrower decides to pay off their mortgage early as a way to compensate for the expected interest payments they expected. The owed sum is typically a percentage of the remaining balance or several month’s worth of interest payments.
If your loan contract states a prepayment penalty clause, you should strategically plan the timing of the house sale. Selling your home within a few years of the term can incur a high penalty, so it’s ideal to sell when you’re closer to the end of your mortgage.
Although it may seem like a disadvantage, being aware of the prepayment penalty puts you at an advantage during the negotiation phase. You can ask for a higher purchase price or request the buyer to shoulder some of the closing costs to offset the penalty.
The Step-By-Step Process of Selling a House With a Mortgage
A house mortgage is a legal obligation that you must satisfy so that the selling process can go smoothly. Unlike selling a house that’s been fully paid, there could be additional steps when putting up a mortgaged house for sale. Follow this process:
1. Request a Payoff Statement From Your Lender
The first thing to do is contact your lender and request a payoff quote or statement. This document tells you how much you owe your lender after selling the house. It doesn’t only include your balance but also any applicable charges or mortgage insurance fees.
The statement will give you instructions on how to give your final payment. Aside from your total loan balance, it will also enumerate any applicable charges, mortgage insurance fees, prepayment penalties, and charges for previous late payments.
Make sure to add some buffer days to your request if you’re still unsure of the closing date to avoid additional charges if you exceed the deadline on the payoff quote.
2. Calculate Home Equity
Next, determine home equity to know the amount you can still have after the sale. Home equity is the difference between your house’s current market value and the amount you still owe on your mortgage.
If your home’s market value increases over time, you can expect higher equity. For example, if you bought a house for $120,000 and its market value is $200,000 today, you have $80,000 equity.
In addition, if you made a large down payment for your mortgage, your home equity is equivalent to that value. As you regularly pay your monthly mortgage, you also increase your earned home equity.
But another pressing question is, can you sell a house with negative equity?
Selling your house with negative equity is often a last resort for people experiencing financial troubles. A negative equity means your house is worth less than your total remaining mortgage.
In this case, you can wait for your home’s value to rise or talk to your lender about other options, like a loan modification or the possibility of a short sale. However, short sales can tarnish your credit and make it difficult for you to buy a new home.
3. Set Your Listing Price and Calculate Net Proceeds
Setting your home’s price starts with researching comparable homes or “comps” in your area. In this way, you can gauge the prices of similar homes in the market and come up with a fair asking price.
If you have the resources, you can hire a professional home appraiser to provide an accurate estimate of your home’s value. After assessing the location, size, amenities, and condition of your house, you can get a detailed home appraisal report.
Real estate agent services also offer comparative market analysis to help sellers finalize a reasonable listing price.
Once done, you can also calculate your net proceeds or profit after the purchase transaction. Aside from subtracting the loan payoff from the appraised value, you need to consider closing costs, lawyer fees, moving expenses, and commission rates if you hire an agent.
4. Determine The Right Time To Sell Your Home
The right time to sell your home is subjective, but there are several factors you can consider:
- Relocation Date: If you have to move because of work or other urgent matters, you might need to sell your house faster.
- Housing Market: If you want to take advantage of a strong housing market, you need to evaluate the competition in your area. You can set your listing price higher if there is an increase in the per-square-foot price of real estate in your area and there are fewer homes available for buyers.
- Financial Status: For those struggling financially, selling their home with a mortgage can ease their monetary burdens. They would want to list their homes as soon as possible to find a more affordable housing option.
- Home Equity Value: Selling too soon can result in financial losses. Paying your mortgage fees for at least five years can guarantee a higher home equity.
- Prepayment Penalty: As mentioned, lenders may require a fee if you choose to pay off your mortgage earlier. Ideally, you should sell your home when your mortgage is at its end term.
5. Prepare Your Home For Listing
Once you’re set to let go of your home, you need to prepare your home for listing. Remember, your house needs to be presentable to potential buyers, so it’s advisable to do some deep cleaning, repairs, and beautification before showing.
Small improvements like changing the flights, arranging the furniture, and adding some home decor can make a huge difference and enhance your home’s appeal. After the makeover, you can hire a professional photographer to take good photos for posting or just go DIY.
Make sure to leverage credible listing sites and even social media to reach a wider audience and increase your chance of selling. Disclosing that you are still paying off the house’s mortgage is crucial for transparency.
6. Sell Your House and Repay Remaining Mortgage
After finding a buyer who is willing to buy a house with a mortgage, you now have the funds to repay your lender! Your profit will be divided up at the closing date.
Of course, you need to prioritize your existing mortgage and make sure to pay before the payoff quote expires. After that, you need to pay other liens, transaction costs, and closing fees.
Managing Financial Considerations Like Costs, Liens, and Payoffs
Before the title can be transferred to its new owner, mortgage lenders need to ensure that there are no outstanding liens on the property. If there are other liens, the buyer might encounter problems with closing.
After selling the house, you are obligated to pay common liens such as home equity loans and home equity lines of credit (HELOC), tax liens, and mechanic’s liens (unpaid services from contractors, subcontractors, and materials suppliers).
Moreover, you’ll have to cover closing costs, which may include the owner’s title policy, escrow account, prorated taxes, and homeowners association (HOA) dues if your property is a condominium or in a neighborhood that’s part of an HOA.
The owner’s title policy is often paid for by the seller as a sign of good faith. It protects the buyer from situations where a legal claim to the sold property is made in the future. Meanwhile, prorated taxes cover the portion of the month you lived in the house before the sale.
Handling Multiple Mortgages or Loans on the Property
There are also cases when a homeowner has multiple mortgages on their property. In general, an individual can get a maximum of two loans on a single house. A second mortgage can either be a home equity loan or a home equity line of credit (HELOC).
A home equity loan allows borrowers to use their earned equity as collateral to borrow money. Just like in a regular mortgage, they must make regular, fixed payments covering both principal and interest.
While a home equity loan provides borrowers with a lump sum of cash, a HELOC offers them revolving lines of credit. This means that one can borrow as little or as much as they need to within an agreed period as long as the amount doesn’t exceed their credit limit.
If you have any of these secondary mortgages, you must also settle them after the sale. Failing to pay these loans puts a cloud on the title and can result in legal disputes.
Key Options and Tips for a Successful House Sale
There are several options if you wish to sell your house with a mortgage, depending on your budget. Here are some of the common ways:
Sell Through FSBO Transaction
If you choose the “For Sale By Owner” or FSBO method, interested buyers can make offers and buy the property from you directly as the owner. This is beneficial if you want to avoid paying agent commissions and gain a larger profit after paying your loan.
However, this means that you’ll be on top of everything, including paperwork, marketing, and other legal processes. You need to work closely with an attorney who will oversee legal matters and real estate transactions.
Although it’s more budget-friendly, securing an FSBO sale can be challenging, especially if you lack knowledge and experience in real estate. In worst cases, your property could stay on the market for too long or not be bought at all.
Hire a Real Estate Agent
Working with real estate agents is a proven way to sell mortgaged houses quickly. For a 6% commission or more, they can evaluate your property’s market position, come up with a favorable listing price, and share their expert guidance throughout the process.
While this option offers more security, it could hurt your chances of gaining an ideal profit. On top of paying your outstanding mortgage balance along with other costs, you’ll be paying a large fee for their service.
Consider Selling to Cash Buyers
Compared to the FSBO method and hiring a real estate agent, selling your mortgaged home to a cash buyer is a faster and easier option. You don’t need to fix your home or do renovations and fancy upgrades before the sale. You can sell your house as-is!
But because these investors are willing to purchase your home regardless of its condition, you should expect their offer to be below your expected value. However, if you factor in other costs, the price could still be acceptable.
Whether you require urgent money or need to move out for a career opportunity, selling your house to a cash buyer is definitely worth looking into.
Key Takeaways: Is Selling Your Mortgaged House the Right Move?
Selling a house with a mortgage can seem daunting, but it’s entirely possible with the right approach. By understanding your mortgage terms and planning your sale carefully, you can navigate the process smoothly. To avoid financial loss, it also pays to be aware of potential costs like prepayment penalties and knowing your home’s equity.
If you’re looking for a quick and hassle-free sale, consider selling your mortgaged house through Kind House Buyers. Call us today at (253) 216-2497 to learn more!
