Can You Sell Your Home Before Your Mortgage Is Paid Off?

If you're considering selling your house, but not sure what the complications are if you still have an unpaid mortgage, fear not.

Consider that only 32 percent of Americans live in homes where the mortgage is completely paid off.

Further, estimates suggest that the majority of home sellers, roughly 60%, still have a mortgage when they sell their house. So, it is very common to sell a house while still owing money on it.

Selling your home can already feel like an intimidating process, so it's good to know that it's more common than not that a seller has an unpaid mortgage. In fact, it's a straightforward process when you understand the steps involved and have experts on your side.

Reasons For Selling Your House with An Existing Mortgage

Common reasons to sell your house before it's paid off include job relocation, downsizing to a cheaper property, or upgrading to a larger one.

There are some important points to consider when making this decision:

• Equity. If the market value of your house is higher than your remaining mortgage balance, you have equity which can be used to pay off the loan and potentially make a profit when you sell.
• Life changes. Major life events like job relocation, family size changes, or retirement can necessitate selling a house even if you haven't fully paid it off.
• Home maintenance. Tired of keeping up with its maintenance and repair needs? This could be due to ageing, physical limitation, disability, or maybe you're just traveling or working too much to keep up. Whatever the reason, selling the property and moving to a less demanding home might be a good option.
• Market conditions. If the housing market is hot and you can sell your house for a good price, it might be a good time to sell even if you still owe money on the mortgage
• Financial strain. If you're facing debt or mortgage foreclosure, selling your home may be the best way to relieve financial pressure.

How To Sell a Home with A Mortgage

In general, you must pay off any mortgage or loans secured on a home when you sell the property. You can list the property for sale and go through most of the process while still owing a balance, but you must pay the loan in full as part of the closing. Here are four steps to follow when selling a house with a mortgage.

1. Contact Your Lender for A Payoff Statement. The payoff statement tells you exactly how much you'll need to pay the lender after you sell your home. Keep in mind that this amount will continue to change every month, so be prepared to show a second statement at your closing date. The statement will also have instructions for your final payment.

2. Estimate Your Home Value and Net Proceeds. Once you know how much you'll need to pay off, it's time to estimate the value of your home and the amount you can expect to receive from selling it. Subtract the amount of your mortgage you'll need to pay off as well as other fees (closing costs, realtor commissions, etc.) and you'll arrive at your net proceeds. You should get a settlement statement before your closing that outlines all these expenses.

There are many ways to estimate how much your home is worth. If you have a real estate agent, they can help you find the value of your home. If you want to go through the process on your own, you can start by looking for comparable homes in your area that are either on the market or already have sold.

3. Sign With an Agent to Establish A Fair Listing Price. If you feel that the net proceeds you will earn can cover the remaining balance of your mortgage and fees, start looking for a real estate agent. They can help you set a fair listing price, analyze any offers that you receive, help you with itemized costs involved in the process, and assist you with contract details and negotiations. Expertise and reputation are not the only attributes to look for in an agent. Make sure you like them and feel comfortable with them because you'll be spending a lot of time together.

4. Sell The Home and Pay Off the Mortgage. Once you accept an offer from a buyer, it's time to sign the purchase and sale agreement, which begins the closing process. Most likely, you'll need to wait for the buyer's appraisal and inspection before you close on the sale. Once you close, the proceeds will be used to pay off your mortgage lender and any outstanding fees or closing costs. Whatever is left is your net proceeds.

What If I Have Negative Equity with My Home?

Having negative equity means you owe more on your home than it's worth. This is often called being "upside down" on your loan. You can sell your house in this situation, but keep in mind you'll have to pay off the difference between the sale proceeds and what you owe. Consult with your bank if this is the case.

Are There Tax Considerations?

If you sell your house for more than your base (the amount you originally paid for the house), the difference between what you sold it for and what you paid is called a capital gain. The government taxes this capital gain, so you must pay capital gains tax on any profit when you sell your house.

The home exclusion on capital gains is a tax benefit that allows you to exclude up to $250,000 of the profit from the sale of your primary residence if you are single or up to $500,000 if you are married and filing jointly. Here are some key points about this exclusion:

1. You must have owned and used the home as your primary residence for at least two of the five years before the sale.
2. The exclusion applies only to gains from selling your primary residence but not to second homes or investment properties.
3. You can only use this exclusion once every two years.

Alternatives To Selling Your House

It's quite possible that you don't want to sell your home but need to make some kind of a change to your current mortgage or living situation. Here are three common alternatives to consider:

1. Loan Refinancing. Consult your current lender and others for options that might lower your monthly payments or otherwise provide you with different loan terms that meet your needs. The two primary types of refinancing to consider:

• Rate and Term Refinance. In a rate and term refinance, you hopefully get a new mortgage with a lower interest rate and possibly maybe even a shorter payment term. When rates are lower, refinancing your 30-year mortgage into a 15-year mortgage may result in similar monthly payments to your original loan, due to the lower amount of interest you would be paying on your new mortgage.
• Cash-Out Refinance. In a cash-out refinance, typically you can refinance up to 80 percent of your home's current value for cash. This is why it is called a cash-out refinance. In a cash-out refinance, you are not always saving money by refinancing but instead obtaining a form of a lower-interest loan for needed cash.

2. Renting Out Your Property:

• Short-term rental. You might consider helping your financial situation by renting your property through a third-party like Airbnb, Vrbo or the many other internet-based services that provide the platform you may want to try.
• Long-term rental. Renting your home for a longer period might be what you're looking for. In that case, you can either list your home yourself or hire a realtor or property manager to help you.

3. Loan Modification. A loan modification is the process of permanently changing your existing mortgage so it's easier to manage. Often lenders allow borrowers to do this because the alternative might be a default and foreclosure, which are costly to lenders. Modification options include:

• Cut the interest rate. With a lower rate, you'll have lower monthly mortgage payments and save on interest long-term.
• Extend the repayment period. Lengthening the loan term lowers your monthly mortgage payments to a more affordable level.
• Reduce the principal. In some cases, the lender might forgive some of the loan balance to lower your monthly payments.
• Convert to a fixed-rate mortgage from an adjustable rate. The interest rate on an adjustable-rate mortgage moves up and down. If it goes up, your monthly payments might no longer fit into your budget, so converting to a fixed-rate mortgage may be a better option for you.

Selling your home while you still have an existing mortgage loan balance is extremely common and typically doesn't cause many difficulties to your selling process. Talk to your lender representative early in the process and get started selling your home with confidence.