Homeowners commonly sell homes before their mortgages have been paid off—but before doing so, it’s important to know how much you’ll need to pay off your mortgage and how much equity you have in your property.
Your mortgage made it possible for you to find a place to call home, but now, circumstances have changed: you’re relocating for work, or maybe you’re upsizing or downsizing. Still, you signed on for a commitment to pay that mortgage over a set period, so what happens if you’re ready to sell your house?
While most traditional home mortgages are for 15- to 30-year terms, not everyone will stay in one place this long. Luckily, just because you have a mortgage doesn’t mean you can’t sell your home before it’s paid off—but you’ll have to do some planning to play your cards right. That’s why home and car insurance
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Can I sell a house with a mortgage?
The easy answer to that is yes. Most home sales involve a seller’s existing mortgage.
For a home sale involving a mortgage to go smoothly, you’ll need to sell your home at a price that’s higher than the amount you still owe on your mortgage. Additionally, you'll need enough left over to cover any other loans tied to the property and closing costs.
Preparing to sell a house with a mortgage
Before taking the steps to sell your home with a mortgage, you’ll need to do some preparatory work. Two of the most important steps will be to get a payoff quote for your mortgage and determine how much equity you have in your home.
Get a payoff quote from your mortgage lender
The first thing you’ll want is to contact your mortgage lender to get a payoff quote.
Your payoff quote will consist of your mortgage balance, any applicable fees, like early payoff fees, and interest due between the day the mortgage payoff quote was issued and its expiration date.
You’ll want to make note of the expiration date on your mortgage payoff quote—if the expiration date passes, you’ll need to get an updated quote.
Knowing the total amount you need to pay off your mortgage can help determine your home’s selling price.
Determine your home equity
Equity is the financial value of a property after any claims or liens, including a mortgage.
You can determine your home equity by subtracting your home’s current market value from the amount you owe on your mortgage and any other liens your property may have, like a home equity line of credit (HELOC).
You build home equity as you make payments on your mortgage. If property values rise in your neighborhood and the market value of your home goes up, that’ll also count toward your home equity.
Determine closing costs
You’ll additionally want to consider how much closing costs might be for your home sale. Ideally, you’ll want to set your asking price at an amount that can also cover your portion of closing costs after your mortgage and other loans are paid off.
Generally, closing costs can be between 3% and 6% of the selling price.
Closing costs typically include items like:
Real estate agent commissions
You might split closing costs with the buyer, or in some cases, it might be negotiated for the seller to cover all of the closing costs.
MORE: How to settle into a new house
How to sell a house with a mortgage
Ideally, the amount you’ve sold your home for is more than your mortgage payoff amount. If so, here’s how a home sale typically works:
Sale proceeds will be applied to your mortgage first
Other liens tied to your property are paid off next
Next, closing costs are covered
Any remaining funds will stay with the seller
Whatever you receive after closing costs is your profit to keep! You could use it as a down payment for your next home, save it for a rainy day, or whatever else you’d like.
Selling a home with a mortgage and negative equity
If your property value is lower than the amount of debt tied to your property, what happens then?
This situation is known as a short sale. Before going through with a short sale, you’ll usually need your mortgage lender’s permission since it would involve them taking a loss for their investment in your property.
They’ll also typically have to okay an offer before you can approve it yourself. With the added step of involving your mortgage lender in your home sale, it can slow down the sales process.
A short sale should typically be a last resort option. Not only will you be taking a loss on your home, but a short sale will also hurt your credit and make it harder to get approved for a mortgage later on.
If your circumstances allow, you could consider staying in your current home and waiting for real estate market conditions to improve to avoid a short sale.
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