Can You Sell a House With a Mortgage?
Buying a house in cash versus buying a house through a mortgage loan is an ongoing debate that comes up when personal finance topics are discussed.
But did you know that over 90% of home sales in the United States are financed?
That number is hardly surprising, since the housing price is approximately four times the annual income. So unless you're born with generational wealth, the American Dream of home ownership is nearly impossible without help from banks and lending institutions.
The average family lives in their home for eight years before selling it and moving to a bigger and better house. And since mortgages usually come in 15- to 30-year terms, it's highly likely that when the time comes that you decide to sell, you'd be selling a house with a mortgage attached.
In this article, we're going to provide you a guide on how to sell a house with a mortgage to ensure that the sale would be financially satisfying (i.e. enough to cover the mortgage payoff amount together with other costs associated with the sale) and everything you must know before initiating the selling process.
Can You Sell a House You Still Have Mortgage Debt On?
Absolutely.
Although a mortgage is technically an encumbrance, it is not a hindrance to selling your property.
If you have other outstanding liens, it would be a different story, but mortgage liens are so commonplace and so easily resolved that it is not considered a cloud on the title. A home loan usually has due on sale clauses that trigger the mortgage payoff as soon as the borrower sells the property, so it is impossible for the borrower to run away with the sale proceeds.
How Do You Sell a House With a Mortgage?
Evaluate Your Finances
Ask for a Payoff Quote
A payoff statement, also known as a settlement statement, is a document that details how much you need to completely pay your mortgage. It doesn't just include the mortgage payoff amount, it also outlines how much equity you currently have, along with the interest owed and other fees your lender may charge, such as an early payment penalty.
Do note that the payoff quote is updated every time you make a payment, so before closing on the sale, make sure to get an up to date settlement statement from your lender.
Calculate Your Existing Equity
Equity is the difference between how much your home is worth and how much you currently owe on your existing mortgage. The key to growing your equity is to just keep making your mortgage payments every month, or consider doing upgrades that would significantly boost your home's market value.
Before pulling the trigger on the sale, review the payoff quote. You must be certain that you have enough equity to cover your mortgage, selling costs, and realtor fees, and then have enough remaining funds for a successful move.
Decide Whether to List It on the Market or Sell Off-Market
Open Market: Sell With a Real Estate Agent or Go FSBO
A great real estate agent will check out comparable sales to get the pulse of the real estate market and be able to price your house correctly.
They will also recommend you to do the following before they show the house to prospective buyers:
Book a home inspection: your real estate agent doesn't want to be caught flat-footed with some eagle-eyed buyers, and so shouldn't you. An inspection would shed light on possible issues and give you time to correct them.
Address issues and fix anything that's broken: sometimes it could be as simple as changing broken light bulbs, replacing leaky faucets and broken locks. Or it could be as serious as a foundation jacking, which may require you to shell out thousands.
If you don't have the budget for repairs, you can borrow against your home investment equity which will then be included in the payoff amount once the sale is finalized.
When working with a realtor, that's about as far as your responsibilities go pre-sale. You don't have to worry about anything else aside from evaluating offers. The agent will be the one to deal with stagings and showings, as well as other third parties involved in the sale such as the buyer's agent, the escrow company, and real estate lawyers.
Working with an agent sounds sweet, right?
Unfortunately, nothing good in life ever comes free. So what's the downside?
The homeowner is normally responsible for paying the agent commissions of both the buyer and the seller, so from that alone, you're going to take out 6% from the sale proceeds.
For a median home price of $467,700, that is a staggering $27,000!
Off Market: Sell Directly to a Cash Buyer
Want the convenience and ease of selling your house with a mortgage without spending a dime on commissions?
Go ahead and find a cash buyer.
With a cash buyer, you don't even have to lift a finger prior to the sale. Cash buyers are usually investors, house flippers, or wholesale buyers who'll be renovating your home to flip it or turn it into a rental anyway, so there's no need to do the repairs or upgrades yourself.
Since they pay in cash, it results in faster closing times--sometimes, in as little as a week.
The downside? Expect to sell below market value. But with the time, energy, and money saved, it would turn out that selling for cash is more cost efficient.
Tap Into Your Sweat Equity and Prep the House for Sale
One of the biggest advantages of selling off the market is the ability to sell a house in as is condition. Just pack your stuff in a moving van, sign some documents, turn over your keys, get the cash, and ride off into the sunset. End of story.
Selling a house with a mortgage in the open market is different. You can't just sell a house as is! You'd need to make it look good to attract buyers. Again, you can DIY or hire professionals. Either way, it comes with some significant investment, monetary and otherwise.
Set a Competitive List Price
You don't want to price yourself out of the market, leaving you on the hook for mortgage payments for a home you don't want anymore, nor do you want to price it so low that you miss out on profits.
What you'd like is a competitive list price that would entice potential buyers to check out your property before hooking them in with your home's features such as a newly upgraded kitchen, remodeled bathrooms, and nearby amenities.
Free Option: Do a Comparative Market Analysis
If you're the type who doesn't mind doing the necessary legwork, literally, you can go around your neighborhood and look at other properties for sale in order to have a benchmark for your asking price.
Alternatively, you can do your research online by visiting real estate websites and looking at their listings.
Just make sure that you're looking at comparable properties: this means they're roughly the same size as your home, with roughly the same features, so don't accidentally end up comparing apples with oranges.
Paid Option: Hire a Professional Appraiser
To give yourself the best chance at setting a fair listing price, you can get a professional appraiser to estimate your home value for a few hundred dollars. An appraisal takes into account real time local market trends, your home's location and condition, lot size, square footage, and a whole host of other factors to come up with a comprehensive valuation.
Market the House--Don’t Be Afraid to Try Creative Strategies!
When selling a house with a mortgage, you need to get the best offers to make sure you have enough to cover closing costs and the outstanding loan balance so you walk away home-free (literally!).
To accomplish that, you can do the following strategies:
Consider staging your home and uploading photos on your social media. If you're worried about the angles, look up Pinterest posts to see how they make it appealing. But if you're willing to spend to sell your home faster, get a photographer who specializes in real estate.
Make an informative and attractive listing to pique buyers' interest. Looking to sell your house? It just won't do to upload a couple of pictures and call it a day. It's important to create a narrative around your house and outline reasons why people would want to live there (great neighborhood, proximity to schools, and so on).
Do a virtual open house. According to the National Association of Realtors, more than half of all home buyers found their purchase through the internet. If you'd like to sell your home more quickly, you can DIY a video walkthrough or negotiate a package with a photographer you hired. What's good about having a virtual open house is that once it's posted, it's similar to hosting an open house 24/7! Just be sure to have someone on the phone ready to field inquiries.
Review Everything at the Closing Table Before Finalizing
After careful evaluation, you now have a buyer with an offer that you like. It's more than the necessary mortgage payoff amount, so you walk away with a hefty profit. However, that doesn't mean you have to be hasty in affixing your signature on the dotted line during the closing process.
In addition to subtracting your outstanding balance from the proceeds, you have to account for the following:
- paying off a home equity loan if you'd taken one out
- the selling expenses you have incurred such as those used in stagings and marketing
- other outstanding liens (mechanic's liens, tax liens)
- real estate agent commissions
- the private mortgage insurance on your new home
- the fees for the escrow agent and the title company.
All in all, expect to take out another 7-10% in closing costs. If there are any remaining funds, then that would be your profit.
Frequently Asked Questions: Selling a House With a Mortgage
Can You Sell a House Within a Year of Buying It?
Yes. There's nothing stopping you from initiating the sale process the moment your house gets turned over to you.
Is it considered wise? No.
Even if you don't owe anything on the house and have made the purchase in cash, from a financial perspective, it is not a good decision. See, there's this thing called capital gains taxes and it is imposed on your home sale profit. After commissions, real estate taxes, and other closing costs, you might find that the sale isn't profitable after all.
To keep the IRS from eating away at your profits, you can elect to sell your house once the tax shield is available, which kicks in after owning the property for at least two years.
Do You Need to Get the Approval of Your Mortgage Lender Before Selling Your House?
Yes. The moment you sign up for a mortgage loan to purchase your home, your mortgage company has a lien, or claim, on your property. The title will only be transferred to you once you have cleared your mortgage balance, and until this happens, they have to protect their interests on the property.
Can It Be Profitable to Sell a House You Still Owe Money On?
Definitely. However, you need to consider a lot of factors to make sure that the sale don't just break even, or worse, leave you in the red. As long as your net proceeds are greater than your remaining loan balance, property taxes, commissions, and closing costs, you end up with a profit which will probably be enough for a down payment on your next home.
What if You’re Underwater on Your Mortgage Balance?
When a property is underwater, it means the existing mortgage balance is more than what the house is currently worth. When this happens, refinancing is close to impossible, and selling a house with a mortgage that's upside down isn't straightforward.
You can consider these options:
Go for a Short Sale
When you sell your home short, you're essentially asking your mortgage company to accept less than what they are owed. For the short sale to go through, you have to obtain their permission. You will be required to present a hardship letter explaining why you can no longer pay, along with an all cash offer from a potential buyer.
A thing to note: a short sale only results in a mortgage payoff, and you literally walk away with nothing from the real estate transaction. Although it will be reflected on your credit history, it's not as devastating as a foreclosure so you can bounce back quicker.
Check if You Qualify for a Relief Refinance
A buyer's mortgage lender typically doesn't allow traditional refinancing unless enough home equity is available (around 20%). For an underwater mortgage, this means you have negative equity.
Fortunately, if you're upside down on your mortgage, you can check if you qualify for the government's HARP program. As long as you have made consistent and timely mortgage payments during the last 6 months, this might be a way out for you.
Wait for a Market Reversal Before Selling
When the market is tilted heavily in favor of the buyers, this means there is an oversupply of houses available and not enough demand. This can result in a steep drop in real estate prices.
To avoid the hassles of refinancing and the pain of a short sale, an alternative is to do nothing in the meantime but simply wait until the market favors sellers again before proceeding with the home sale.
Is It Possible to Sell Your Mortgaged House and Buy a New One at the Same Time?
Ideally, when you sell your house with a mortgage, you'd want to secure a new home at the same time to ensure that you'd always have a roof over your head or avoid "wasting" money on rent that should've gone to your mortgage.
However, doing this might require you to dip into your savings account for the down payment on the new home since the sale proceeds and other funds related to the transaction would likely be held in an escrow account, and thus, unavailable to you.
If you lack the liquidity for your new home purchase, you might be mulling over taking on two mortgages, or perhaps considering giving out offers with a home sale contingency. Sellers are wary of the latter option, as this introduces uncertainty in the sale.
The best way to go about this is to sell your home to a cash buyer who can simplify the selling process. What's more, they are open to working on your timeline so you can choose the closing date!
Final Thoughts: Selling a House With an Outstanding Mortgage Balance
Want to simplify the process of selling a house with a mortgage?
Let us help connect you with a cash buyer!
Here at House Buyer Network, our passion is helping homeowners find quick and easy solutions to real estate problems. Fill in the form below with your property address, your phone, and your email and get a no obligation cash offer within 24 hours! Once you accept, we close on the date you choose--fast and hassle-free!
Got questions? Call us at (855) 835-2544 to talk to us!
