Homeowners

Selling a Home with a Mortgage? What You Need to Know

You might need more space—or you want to downsize. Maybe you’re moving out of state. Regardless of the reason, you’re ready to sell your home. There’s just one hitch: You still owe money on your mortgage.

Luckily, putting your home on the market with an outstanding mortgage isn’t a red flag. It’s actually the norm. Most sellers are still paying off their loans when that “For Sale” sign hits the lawn.

However, the process requires a few more steps (and a little know-how) to pull it off smoothly.

Here’s how to sell a home with a mortgage—and what home sellers may want to watch for—before they list their properties.

How to sell a home with a mortgage

Most sellers want to know happens to the proceeds from the sale—and how soon they can get that cash.

“The money earned from the sale will first go toward repaying the remaining loan balance,” said Seamus Nally, CEO of TurboTenant.

Whatever’s left over—after the loan is satisfied and closing costs are handled—is yours to pocket.

Just make sure you know your exact payoff amount. You can start by requesting a mortgage payoff statement from your lender.

“You will want to ask them, ‘What will I owe if I pay off my mortgage today?’” said John Olivero of the Keller Williams Olivero Team in Goshen, N.Y. “This amount will likely be slightly different from what your mortgage statement shows because interest on your mortgage is calculated daily.”

The payoff process happens behind the scenes

Once your home goes under contract and the payoff amount on the settlement statement matches what your lender quoted, the closing agent or attorney will work directly with your lender to pay off your loan.

You won’t have to cut a check or make a bunch of calls—it’s mostly handled for you.

Be aware of what type of loan you have as that may affect the speed of the process. Some loans rely on tech, others on communicating using hard copies of documents.

“It can cause major delays if you don’t get ahead of it,” said Erika Compeau, transaction coordinator for Marketplace Homes, a real estate brokerage and property management firm. 

Watch out for mortgage prepayment penalties

Certain mortgages include prepayment penalties if you pay off the loan too early, often within the first three to five years.

“They do this to prevent flippers and investors from buying a home with the loan on the pretext of purchasing it for their own use and then quickly selling it,” said Cory Pinter, a real estate investor with Inhertied House Guide. 

These fees can feel unexpected even though they were outlined in your loan. That’s why it’s important to check your original loan documents or ask your lender outright.

“Also, any second mortgages or liens on the property must be paid off at closing, which can surprise sellers if they’re not prepared,” said Irvin Thompkins, an associate in business development at Marketplace Homes.

Check to see if your loan is “assumable”

An assumable mortgage is a type of home loan that enables a buyer to take over the seller’s existing mortgage rate. The buyer keeps the same terms as the seller, including the current interest rate. This can make your home more attractive to buyers facing higher mortgage rates.

“Most homes will not qualify with assumable loans but if they do, you have the Willie Wonka golden ticket,” said Jeff Lichtenstein, CEO and Broker at Echo Fine Properties in Palm Beach Gardens, Fla.

Ask your lender upfront if any prepayment penalties or fees are tied to the loan assumption. And once the deal is done, double-check that you’re fully released from the mortgage with no lingering strings attached.

“See who qualifies and what restrictions there are ahead of schedule,” said Lichtenstein.

Also, look at other restrictions on assumable loans, such as credit score and down payment requirements.

What if you’re “underwater” on your mortgage?

Things get trickier if your mortgage balance is more than what your home is worth.

This is known as being “underwater,” which may mean you need to bring money to the table to close the deal—or pursue a short sale with lender approval. It’s not impossible, but it adds some complexity.

Start by getting a professional home valuation and comparing it to your loan payoff—then talk to your lender about your options. A real estate agent with short sale experience can also be a key player in steering the process.

Thinking of buying and selling at the same time?

If you’re buying your next home while selling your current one, timing is everything—especially when mortgage payoffs are in play.

Talk with your real estate agent about options like bridge loans, sale contingencies, and lenders that will buy the home in cash for you until you get a mortgage. This can help you juggle both sides of the move.

“If you plan to purchase a home after selling and will need a mortgage for your next home, it is a good practice to get pre-approved now,” said Olivero. “This will require a credit check.”

Your credit report will list any mortgages in your name, offering a second way to confirm what you owe.

“The mortgage lender handling your pre-approval can show you ways to qualify for your next home without needing to close on your current home first—an advantage in a strong seller’s market,” added Olivero.