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Can you sell your house before paying off the mortgage? 

 June 8, 2021

By Scott Teesdale  

minutes read time

If you want to sell your home, you should know that you don’t have to wait until you pay off the mortgage to do so. Of course, you get the most value if you pay off your home completely before putting it up for sale, but it’s not necessary to do so. In fact, countless homeowners do it every year. The process can be simple, but before going through it, homeowners should know some very important information.

You can sell your home before paying off the mortgage if:

  • You have equity in your home (without equity, homeowners may be able to sell to investors or investment groups)
  • Your home has not declined in value (i.e., you are not “underwater” with negative equity in your home)
  • You port the mortgage

Be sure to recognize the terms of your mortgage. There’s a chance you have a prepayment penalty that a lender will utilize if you decide to sell a home. The sale would sufficiently cover the remaining cost of the loan, but profits may not be what they seem because of the prepayment penalty a homeowner may need to pay.

How much equity should I have in my home before selling?

When selling a home, equity is one of the most important things to consider. Equity is the value of a home minus what the homeowner owes on the remaining balance of the mortgage. For instance, if a homeowner has a mortgage with $250,000 remaining, and the current value of their home is $325,000, they have $75,000 of equity. When selling a home, it’s vital to ensure that there’s enough equity to sell the home without worrying about qualifying for a loan to pay for the next home.

You should have enough equity to pay off the entire cost of the mortgage, as well as a 20% down payment for the next home, or allow for moving arrangements.

Here’s a quick scenario. If you have $230,000 left on a mortgage, and you want to buy a home that is worth $500,000, you should have at least $100,000 of equity. It’s essential to sell the home for $330,000 to pay off the mortgage and have the 20% down. If there’s a prepayment penalty, it may be necessary to factor this in, as well as closing costs. 

How much of the money do you get from selling your home with a mortgage still intact?

Several factors impact how much money the homeowner gets after selling a home when the mortgage is still intact. At the end of the day, the math is dependent on money owed, closing costs, commission, and more. The amount you receive is the selling price minus the costs associated with your current loan and moving expenses. 

Here are some of the aspects of real estate that may impact how much you recover:

  • Closing costs: If a homeowner needs to pay for closing costs on the sale of their home, as well as on their new home purchase, that lowers your overall profit. 
  • Down payment: When a homeowner intends to purchase another home after selling, they must factor in down payment. Removing this from the profits can give a better idea of how much money the homeowner gets. 
  • Commission prices: Many homeowners utilize agents to sell their home for top dollar. Commission fees are often around 5 or 6%. What this means is if your home sells for $300,000, you may pay around $15,000 to $18,000 in commission fees between your agent and the buyer’s agent. 
  • The remainder of the mortgage: You have to pay off the remaining loan balance for the existing mortgage. If you’re prepaying, the penalty may also impact how much you have to pay.

Depending on your intentions after selling a home, the equity in a home may be the full profit and the party selling the home may keep all of it.

Do I need to let my mortgage company know before I sell my house?

Most people feel as though they have to inform their mortgage company of the pending sale at the beginning for the process. It’s important to note that this is not a requirement. You will, however, have to settle the mortgage with the lender upon closing the sale.

The current mortgage company has very limited involvement when selling a home. In a short sale, however, not informing your lender can lead to numerous problems because you need to obtain sale permission.

A homeowner can discuss with their mortgage company about the payoff price and a potential prepayment penalty, but they don’t have to mention the home sale until the process is officially complete. Once you receive a quote for your mortgage payoff price, you typically have 10 – 30 days or you may notice a difference when you receive your statement. 

Towards the end of your sale, make sure you provide the lender with information regarding the buyer and who their lender is. Typically, the only concern a lender has is that the buyer is qualified and has secured their loan from a reputable company. As long as the buyer is financially able to purchase the home, there should be no problem getting through the process.

What is porting a mortgage?

Porting a mortgage is when the homeowner transfers their existing rate and combines it with a new rate for something that is more favorable. For many, the option of porting a mortgage becomes a real possibility. This occurs most often when a homeowner has good rates and terms associated with their current mortgage loan. Porting the mortgage allows homeowners to take the mortgage they currently have (rates included) to the new home. The ported amount may also help to ensure there are no prepayment charges. 

One of the benefits of porting a mortgage is the ability to purchase a new home while the sale of your current home is still pending.

Now you know all the ways to sell your house before paying off the mortgage

At the end of the day, you can sell your house before paying off the mortgage. However, it’s important to recognize the most effective way of doing so. Always make sure you know when to inform the mortgage company and how to move forward with the necessary paperwork to sell your home effectively.

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I use data and technology to help Millennials navigate the ins-and-outs of buying or selling a home in today's market. From appraisals to mortgages to zoning, I cover it all with the goal to teach others. Connect with me on social via the icons above.

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