Sell a house that has mortgage when you technically share ownership with the bank? While it might seem complicated, to sell a house that has mortgage is actually quite straightforward. Even if you haven’t significantly reduced your loan balance, you still have options.

We all aspire to be mortgage-free, but for most, it takes around 25 years to fully pay off a home loan. This means that when it’s time to sell your home, you’ll likely still be making mortgage payments.

You can transfer your existing mortgage to a new property, whether you’re looking to upgrade, downsize, or even exit the market altogether.

Before you make any plans, it’s crucial to understand your mortgage terms and obligations to your lender, including any associated fees and the timeline for completing the sale.

Start by getting your property appraised to determine its value. Next, calculate the remaining balance on your mortgage and the funds required for your next home.

Can you sell a house if you still have a mortgage on it?

Yes, you can sell a house that has mortgage. It’s quite common for homeowners to sell their properties before fully paying off their mortgages, especially since the average homeowner stays in a home for about 13 years.

Understanding how to sell a house that has mortgage is crucial. The key is to sell your home for more than the remaining balance on your mortgage. Doing so allows you to pay off the mortgage and retain any extra proceeds. Additionally, if you plan to buy a new home, you can use the profits from the sale as a down payment.

If the sale price of your home is less than what you owe on the mortgage, you’ll need to cover the difference out of pocket. To avoid this, it’s important to assess your home’s value and compare it to your mortgage balance to ensure you have sufficient equity to sell at a profit.

How to sell a home with a mortgage

Typically, you need to clear any mortgage or loans secured against your home when trying to sell a house that has mortgage. While you can list and market the home while still having a mortgage balance, the loan must be fully paid off by the time of closing. Here are four key steps to follow when selling a house with an outstanding mortgage:

Contact your lender for a payoff statement

Planning to sell a house that has mortgage? The first step is to request a payoff statement or letter from your lender. This document will detail the exact amount required to settle your mortgage upon sale. Since your mortgage balance changes with each monthly payment, even if you have a fixed-rate mortgage, be prepared to request an updated statement as your closing date approaches.

The payoff statement will provide instructions for submitting your final payment, including the total amount due, which covers accrued interest and any additional charges. It may also outline any penalties for late payments or early repayment, if applicable.

Estimate home value and net proceeds

Once you have the payoff amount for your mortgage, the next step is to estimate the value of your home and determine how much you can expect to receive from the sale.

To gauge your home’s value, start by looking at comparable properties, or “comps,” in your area that have recently sold or are currently on the market. If you have a real estate agent, they can assist you in finding these comps and offer valuable insights.

Alternatively, you can use an Automated Valuation Model (AVM) by entering your address into an online tool. While these tools provide a rough estimate, they may not be entirely accurate. For the most precise valuation, consider hiring a professional home appraiser.

Keep in mind that if you owe $150,000 on your mortgage and sell your home for $300,000, the remaining $150,000 is not all profit. Selling a home involves various costs, including closing fees, real estate agent commissions, and possibly attorney fees. These expenses will be deducted from your proceeds. Before closing, you should receive a settlement statement detailing all these costs to ensure your net proceeds are enough to cover both your mortgage payoff and the associated selling expenses.

Find an agent and set a fair listing price

If you believe that the net proceeds from selling your home will cover the remaining mortgage balance and associated fees, the next step is to find a real estate agent. It’s important to choose an agent who is both skilled and someone you feel comfortable working with, as you’ll be closely collaborating throughout the sale process.

A knowledgeable real estate agent can help you navigate the local market, set a competitive listing price, and attract potential buyers. They will also assist you in evaluating offers to ensure you’re securing the best possible deal.

Additionally, your agent should prepare a seller’s net sheet, which is an itemized statement outlining estimated costs and showing how much you can expect to earn from the sale. Ideally, your agent will provide you with an updated net sheet with each offer you receive, allowing you to compare bids and determine which one will yield the highest net profit.

Sell the home and pay off the mortgage

Once you accept an offer—congratulations!—you’ll need to sign the purchase and sale agreement, which kicks off the closing process. You’ll likely have to wait for the buyer’s appraisal and inspection to be completed before you’re ready for closing day.

On closing day, the proceeds from the sale will be used to settle your mortgage and cover any remaining fees or closing costs. A representative from your lender will be present at the closing to collect the amount due to them. The remaining funds after paying off these obligations will be your profit, known as the net proceeds. For instance, if you sell your home for $300,000, owe $150,000 to pay off the mortgage, and incur $20,000 in closing costs, your net profit would be $130,000.

Selling a home that’s underwater

One challenging scenario when trying to sell a house that has mortgage is dealing with negative equity, also known as being underwater or upside down. This occurs when your home’s market value is less than the remaining balance on your mortgage.

For example, suppose you purchased a home for $300,000, putting down 20% and borrowing $240,000. If the real estate market declines and your home is now worth only $215,000, but you still owe $225,000, you are underwater. In this situation, you cannot sell the home for a price that covers the full amount you owe on the mortgage.

Here are a few options if you find yourself in this predicament:

Offer a Short Sale

You’ll need your lender’s approval to sell a house that has mortgage balance. The bank must agree to accept a loss on the loan. If approved, the bank will have the authority to accept or reject offers. While a short sale allows you to avoid paying the entire remaining balance, it significantly impacts your credit score. According to financial expert Cohn, “A short sale is the credit equivalent of a foreclosure, so it negatively affects your credit for up to seven years.”

Pay Out of Pocket

If feasible, you could cover the shortfall with your savings or by liquidating investments. In the example above, this means coming up with $10,000 to fully repay the mortgage. While this option is not ideal, it will help preserve your credit score, which is beneficial if you need to rent a new home or apply for a mortgage in the near future.

Put Your Sale on Hold

If you can delay selling, you might consider holding off for the time being. Renting out the property, if the rental income covers the mortgage payments, could allow you to keep the home until its market value improves or your financial situation changes. Over time, the real estate market may recover, potentially enabling you to sell the home for a profit or at least break even.

What happens to your mortgage when you sell your house?

You can sell a house that has mortgage by paying off the remaining mortgage balance in full when you close the sale. This process clears your debt associated with the home.

Be aware that if you pay off your mortgage early, you might incur a prepayment penalty or early repayment fee, depending on the terms of your mortgage agreement. Additionally, if your mortgage includes an escrow account, any funds held in escrow will be refunded to you upon the sale.

Assumable mortgages

If your mortgage is backed by a government entity such as the FHA, VA, or USDA, you might have the option to sell a house that has mortgage. This means that instead of paying off your existing mortgage and the buyer taking out a new loan, the buyer can assume your current loan under its existing terms.

This can be particularly advantageous because the buyer inherits your mortgage’s interest rate. If your loan has a lower interest rate compared to current market rates, this can be an attractive feature for potential buyers. However, it’s important to note that the buyer can only assume the remaining balance of your mortgage.

Can a mortgage stop you from selling your home?

This situation arises only if you’re underwater on your mortgage. If you owe more on your mortgage than your home’s current market value, selling the property through traditional means could be challenging. Your lender might not permit a sale for less than the outstanding mortgage balance, and potential buyers (or their lenders) might be hesitant to pay significantly more than the home’s appraised value. However, if your home’s value exceeds what you owe on the mortgage, you’re unlikely to encounter such issues.

What happens when you sell your home for a profit?

We’ve discussed what happens to your mortgage when selling your house, but what if you end up making a substantial profit from the sale? Ideally, your home’s value would have appreciated during your ownership, leading to a sale price higher than what you originally paid. However, this profit might be subject to capital gains taxes.

Typically, for capital gains taxes to apply in real estate, the home must have been your primary residence, and you must have earned a significant profit—usually hundreds of thousands of dollars. Fortunately, if you sell a primary residence, you can exclude up to $250,000 in profit from capital gains tax, or up to $500,000 if you’re married and file jointly.

Conclusion

You can certainly sell a house with an existing mortgage, but it’s important to consider your existing balance and whether it’s the right time for you to sell. Your real estate agent can help you set a fair listing price and give you tips on preparing to sell. You can use the proceeds from your sale to pay off your existing mortgage and any other liens. What’s left is yours.

If you’re behind on your property tax or mortgage and need to sell fast, you can pay off your debt and avoid foreclosure if you sell your house for cash to us. Contact Illinois Real Estate Buyers today. We can give you a no obligation, as is cash offer and help you sell fast in order to pay off outstanding mortgages.