A mortgage is a long-term commitment; you sign up for twenty to thirty years of repayments, expecting to occupy the home indefinitely. Statistics show that very few homeowners stay in the same house for this long.
Fortunes change, and you find yourself needing to move out before the mortgage has been fully paid off.
If you are in this position and are asking yourself if you can sell the house before paying it off, the answer is yes, you can. Many homeowners have done it successfully, and many more are still doing it.
We are about to take you through how people list their houses for sale while still repaying mortgages and what you should consider before going down this road to avoid getting burned.
Your current lender will provide a quote showing your current mortgage payoff status.
These quotes are calculated down to the day and are typically valid for ten to thirty days (the lender will advise) as they are prone to change with interest fluctuation. The payoff quote should include any penalties and closing costs you will be responsible for.
With this information in mind, you will set your listing price. Consider the prevailing market prices as you don’t want to be way above the going price for similar properties.
This will turn away potential buyers before they even view the house. You also don’t want to underquote and leave money on the table.
If the funds are sufficient on the closing day of the sale, your title company will pay your lender the entire amount of the payoff quote from what the buyer pays. The lender will then settle that particular mortgage account and close it.
Conveyance, the transfer of the house’s ownership from you to the buyer, can now be executed.
Once the mortgage lender receives all their money, everyone else who needs to be paid is paid from the proceeds before receiving the remaining amount, including your realtors and lawyers.
The sale might not generate enough funds to settle the mortgage, which forces you to make other arrangements. Keep reading for options when the sale comes up short.
You get into negative home equity when your house’s selling price is insufficient to cover your outstanding mortgage. This position is also called being underwater in real estate circles.
It doesn’t often happen because lenders usually conduct their own appraisal before granting mortgages and will not approve lending beyond the appraised value.
It is possible when a recession wipes out people’s purchasing power, which lowers demand, dragging property value with it. It is also possible if it is a newly built house that was bought recently, the mortgage repayments will not have significantly reduced the principal.
Loading interest may raise the amount due above the property value. The house’s market value also dips significantly if it is in a state of disrepair.
You can sell the house even when it has negative equity, but you will have to cover the difference with your savings because you will sell it for less than what you owe the lender.
The lender has the right to pursue legal redress if you cannot pay the difference, and you will be ordered to pay them by a court of law. You risk jail time or having other assets seized to compensate the lender.
Suppose the property’s appraisal shows its market value is below what you need to pay off the mortgage, and you are planning to sell it. In that case, you should approach your lender immediately to start a conversation around viable solutions.
The lender might agree to a repayment plan for the outstanding amount or even accept a short sale that allows you to pay less than the full outstanding amount. Both options will prevent legal action against you and keep you in your lender’s good books.
If moving is not a life and death requirement, you can always delay the sale until the market becomes favorable again. You can stay in the house and keep updating the monthly mortgage payment or rent it out so your tenants can cover the mortgage as you build back your home equity on a rental property.
You must pay the outstanding balance and any charges or extra mortgage payments that will be due per the mortgage contract. These also include mortgage exit fees, early repayment charges, and any accrued mortgage interest.
If the home sells for less than what you owe the mortgage company, all the proceeds will go directly to the lender to settle what can be settled. You will then be furnished with a bill for the outstanding amount on the mortgage contract that exposes you to litigation if you don’t pay within a given time frame.
Yes, you have to settle any outstanding balance on the mortgage along with any accrued interest or charges the settlement might trigger as per the agreement with the lender.
There is an option of porting or transferring the mortgage to another house that is only applicable if you are buying another house simultaneously as you sell the current house. It will seem like you are taking your existing mortgage with you when you move house, but your old mortgage will still be paid off by the proceeds from the sale of the house.
You just retain the same lender, mortgage rates and terms of engagement for the new house you are buying. The amount of the mortgage can vary because it will be pegged on the selling price of the new property.
The lender will appraise you and the property and judge whether you can afford the mortgage and how the new house impacts their risk before approving the porting.
Porting a mortgage allows you to maintain favorable interest rates and lending conditions when you feel the current situation will be more punitive than your existing deal.
It also hastens the new house closing as the mortgage servicer already has most of your information. You also avoid early payment charges for selling the previous house before paying it off.
You need to inform your current mortgage lender you are selling the house so they can provide a breakdown of how much you owe and if any charges or extra mortgage payments need to be considered.
Technically, you don’t have to inform them until you have accepted a legitimate offer on the house, but we find it better to have their breakdown earlier in the process so that you can shape the sale budget around it.
Comparing the outstanding mortgage loan balance and the prevailing market price will go a long way in determining how you approach the sale.
While your mortgage company can’t dictate who you sell or not sell to, they have a right to request the preapproval from the home buyer or evidence of their ability to pay. You shouldn’t object to this as it also helps you appraise the home buyer.
Selling the house triggers mortgage payment on the spot as you need to clear with the lender before the conveyance of the property can be completed.
Early payment might attract charges that would be avoided if you paid off the mortgage through the stipulated period. Going by this logic, it is more profitable to pay off the mortgage gradually to the end of its period. This also helps to avoid payment confusion.
Being stuck in a house that is not fit for your current situation might also have its own financial and emotional costs. If you are going to pay off the mortgage before its time elapses anyway, it doesn’t matter if you pay it off before or after selling the house.
You will be subjected to the same charges before closing, limiting the benefits. The longer you have owned the property, the higher the percentage of the mortgage you have paid, and the cheaper it is to exit the mortgage loan agreement.
Early payment charges are usually a percentage of the outstanding mortgage loan amount, so they will be lower if the balance is lower.
In light of the above, we can’t lay a hard or fast rule on whether it is better to pay the mortgage before or after the sale. Your unique circumstances will determine the best option in this regard.
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