What Happens to Your Mortgage in a Typical Sale
In a traditional home sale, ideally, you will sell your home for more than the amount that’s left on your mortgage. Especially if you’ve been paying the mortgage for years, you will have equity built up in your house, and you can cash in on it when you sell the home.
When it comes to closing time, between the mortgage loan and the down payment, the buyer will bring funds to settle that are equal to the sale price of your home. Then, those funds get used for paying off:
- The remaining mortgage amount
- Any HELOCs or home equity loans that you have
- Your closing costs (taxes, commission, etc.)
Any money left over after those debts are paid goes to you as profit. Then, you can use those funds for the down payment on a new home or for any other purpose.
Related: Different Types of Mortgages
What Happens to Your Mortgage in a Short Sale
A short sale is when your home gets sold for less that the amount of total debt that is against your property. As the homeowner during a short sale, you would have to contact your mortgage company and see if they will accept a loss because the proceeds from the sale are less than what you owe them.
The selling process works differently in a short sale. Instead of getting the final say on accepting or declining an offer, your lender must approve it before moving forward; this can slow down the process significantly.
What Happens if You Buy and Sell at the Same Time
If you want to buy and sell a house in the same time frame, selling your current home is the easiest way to go about it. Selling first allows you to use the payout from your old home to make a down payment on the new one.
If you decide to buy another home first, you’ll have to do some extra work when arranging the transaction details for both mortgages. You won’t have the funds from the sale of your home to work with or use as a down payment for the new one, so you might have to consider other financing options, like:
Home sale contingencies
You can use a home sale contingency by including it in the offer for purchasing a new home. This contingency states that you will find a buyer for your old home before closing on the new one. In this case, if you can’t find a buyer, there is an exit clause in the contract. Sometimes, having a home sale contingency in your contract makes the offer less appealing to sellers.
Another option you have is to get a bridge loan. Bridge loans are short-term, and you can use them to help pay off your mortgage and get a down payment for the new home. After selling your old house, you can use those funds to pay off the bridge loan.
While not the most appealing option, you can carry two mortgages while you look for a buyer. This way, you can make offers on other homes without relying on things like home sale contingencies. This option only really works if you can afford to pay both mortgages until you’re able to sell the old home.
Related: House Buying Checklist
If You Want to Sell Your Home Before the Mortgage is Paid Off…
Contact Your Lender
The first thing you need to do is to speak to your mortgage lender to get a payoff quote. Your lender will give you an exact amount, valid for 10-30 days; this is the price to pay off the whole mortgage at once, and it’s calculated regarding interest rates and closing fees.
You should also check your loan documents for prepayment penalties— these can affect how much you’ll pay out of pocket upon selling. Prepayments aren’t as prevalent as they used to be, but you still need to know if there will be additional fees when selling your home.
Decide on a Sale Price
Now it’s time to decide on a reasonable sale price for your home — don’t worry, your real estate agent can help you. Ideally, you want the sale price to cover the mortgage payoff amount, closing costs, and expenses that you incurred getting your home ready for the sale. After closing, you’ll pocket any profit that’s left, which you can use for buying a new home or other future investments.
Get Your Estimated Settlement Statement
You want to make sure that it makes sense to sell; you want to turn a profit after all of the incurred fees and expenses to make selling your home worth it. Working with your real estate agent, they’ll open an escrow account for you. After opening this account, they can give you a breakdown of estimated costs and give you a better picture of how much you’ll make from the sale.
What About Selling a Home That’s Underwater?
A home that is “underwater” means that the homeowners have negative equity– they owe more than the home is worth). While it’s not impossible to sell a home that’s underwater, there are some setbacks you will face. These are your best options:
Delay the sale:
If it’s appropriate for your situation, you should stay in your home and pay the mortgage while waiting for market conditions to improve. You could also rent out the home in the meantime.
Pay out of pocket:
You can pay your lender the difference after closing, but this is less than ideal for most people; it’s only feasible if you have cash available and can’t wait to sell the house.
Request a short sale:
Short sales, which we mentioned above, can work when you need to move but owe more than your home’s worth. Most lenders would rather help you with a short sale than have to foreclose on the home.
Related: Buying a Foreclosed House
Are you looking to buy a new home or refinance your existing mortgage? Find out how Mares Mortgage can help!