Selling Your House Before The Mortgage Is Paid Off
You'll likely make some money if your home is worth more than what you owe to the bank.
Here Are Some Steps To Sell Your House Before You Pay Off The Mortgage
These are the three steps to follow before you sell a house with a mortgage.
Contact Your lender
Ask your mortgage lender to determine your current mortgage payment. This will help you decide if it is worth selling your house. The quotation you receive will usually be valid for between 10 and 30 days. It may also differ from the monthly statement.
Also, make sure to review your loan documents for any prepayment penalties. This will impact how much you get when you sell. Prepayment penalties are fees you might have to pay if your loan is not paid. Prepayment penalties are becoming less common. Some prepayment penalties cover only a certain period, such as selling your home within five years. There are many ways to calculate a prepayment penalty, and each lender will vary. This could be a percentage (usually between 2-5%) or a percentage owed interest.
Your mortgage lender cannot tell you who you may sell to; however, they can ask for proof of funds or pre-approval from a buyer.
Set A Sale Price
Your real estate agent can help you set a reasonable price for the sale of your home. You want to sell your house for an affordable price. This includes your mortgage payment, closing costs (including a 5-6% agent commission), taxes, and any other expenses that you incur in getting your home ready for sale.
You'll receive any remaining profit at closing. This will hopefully allow you to make future investments or purchase a new house.
Receive An Estimate Settlement Statement
It's essential to determine if it makes financial sense for you to sell your home. This means that you will make enough profit to cover all of the closing costs, commissions, and other expenses involved in selling your home. If you are selling FSBO, a real agent will open an escrow account for you. Your escrow agent or title agent will provide you with a breakdown of the estimated closing costs once your account has been opened. Although the amount you walk away with will depend on what offer you receive for your house and the time you close, the estimate will better picture the closing costs.
How To Sell A Home That Is Underwater
Positive equity is a common outcome for home sellers. Nationally, less than 10% of homeowners have Negative Equity. This means that they owe more than their home is worth. This is also known as "being underwater."
Sellers can often find themselves underwater when they take out a second mortgage to pay off other debts or expenses. Then, when it comes time to sell, sellers have two mortgages to repay, and the market is declining.
Although it's possible to sell your property underwater, you may face serious setbacks. These are some of the options:
You can delay the sale:
If your financial situation permits, you could stay in your home and continue to pay your mortgage until the market improves. You could also rent the house until you have equity and then let your renters pay the mortgage.
Pay Out-Of-Pocket:
While it's not ideal, you could pay the lender the difference in cash at the closing. Of course, this is only possible if you have extra money and can't sell later if the market is better.
Request A Short Sale:
If you have to sell your home and you owe more than the value of your home, you might want to consider a short sale. A short SALE is when a lender agrees that you will reduce the amount you owe to the house in order to assist you with selling it. Short sales are less likely to be approved by lenders if the lender is concerned that you will foreclose on your home. To get approval, you will need to show hardship.
To ensure quick sales, short sales are often priced below market value. Your lender may also require an all-cash offer to get rid of their investment. Lenders may require you to sign a promissory notice, which is a contract that requires you to continue making partial payments on the debt until the sale closes. You should note that short sales can adversely affect your credit score and may limit your ability to purchase another home.
Who Pays The Mortgage Payments While Your House Sells?
The home is yours until it closes. You will be responsible for all mortgage payments. Although the average time between acceptance of an offer and closing is 30-45 days for a home, buyers may request shorter or longer closing times. Your settlement statement may require that the final mortgage payment be paid at closing. This depends on the date and the location of your last mortgage payment.
Your settlement statement (also known as a closing statement) will answer all your questions about who pays for what expenses. Your settlement statement, as the seller, will contain an itemized list and credit of fees and credits. It will also detail your net profit.
Your settlement statement will depend on the state that you reside in. It will be prepared either by an attorney or a title company. The actual closing appointment will take place at the office of the person who prepared it.
You will receive the proceeds from your sale if you owe any mortgage payments. However, you will not receive any funds. The title company will issue all parties owing money checks.
The Time When You Make Your Final Mortgage Payment
Your mortgage lender may lump your final mortgage payment in your closing. This means that you won't need to pay your regular monthly payment while your transaction remains in escrow. Instead, it will be taken into account at the closing table.
Make sure to review your estimated settlement statement and understand how your mortgage payment will work. Inadvertently missing a payment during a home sale could result in a late fee and a negative credit score.
Your mortgage will be your responsibility until the property is sold. If your settlement statement states that you are responsible for paying your mortgage in escrow, you will be reimbursed any excess payments at closing.
This is because mortgage interest is paid in arrears, meaning your May interest payment will pay for April's interest. However, your mortgage principal is paid in advance. Therefore, your May principal payment will pay for May's principal. You may receive a refund for principal overpaid but may owe additional interest depending on when you close.
You'll pay what you owe regardless of whether you make your final mortgage payment before closing or after closing.
Is It Better For You To Pay Off Your Mortgage First Before You Sell?
If you have the cash, paying off your mortgage before it is sold might seem like a great way to avoid any mortgage payments. There is a limited benefit to paying off your mortgage in full prior to selling. It would be possible to offer seller financing, but you may end up owing more at closing. Why? You could face a prepayment penalty depending on your loan terms.
Are You Able To Have Two Mortgages Simultaneously?
It can be difficult to buy and sell simultaneously. For example, you may not be eligible for the new loan if you have the original mortgage in force. In addition, people often need cash from the sale of their house to pay for their down payment.
If you are unable to manage both the debt-to-income ratio and cash availability, you might need to sell your old home first. Then wait for the transaction to clear before you purchase another one. You may be able to make an offer on a home contingent upon the sale of your previous home, depending on the market.
These are some alternatives:
Bridge Loans
A bridge loan allows you to borrow the down payment to purchase your new home while you wait for the proceeds of the sale to become available. While you will need to be eligible for the new loan, your old home must still be in your possession. You'll also have to be able to afford to pay the two mortgages and the interest on the bridge loan for a brief period.
Assumable Mortgage
Assumable mortgages are where the seller takes over the seller's mortgage. This arrangement is only available for FHA and VA loans. This arrangement requires lender approval, and generally, there is no change to terms. The buyer will assume your interest rate and loan balance. This arrangement is advantageous for the seller as it allows you to advertise that you are open to an assumption mortgage in your listing description. In some cases, this gives your buyer access to a lower interest rate than the current one. This can be a boon for negotiation -- buyers may be more willing to pay more if they get a lower monthly payment and a better interest rate.
Assumable mortgages are not easy to arrange. The buyer will often need to have sufficient cash to make the transaction possible. For example, if you sell your home for $300,000.00 and have $150,000 in outstanding loans, the buyer will assume the $150,000 mortgage but will need to bring $150,000 more to reach the final price.
How To Reduce Buying And Selling Overlap
You'll pay more if you have two mortgages. Consider selling your home to a cash buyer to minimize overlap. Although they are usually willing to close quickly, you may have to sell your home for less than the market value. Many cash buyers are investors who want to make as much money as possible.
Is It Possible To Make Money By Selling S House That You Owe?
When you sell a house before your mortgage is paid off, the amount you make will depend on the price you sell it for, how much of your existing mortgage you have, and what transaction fees you have to pay. Therefore, it is best to estimate your financial outcome before you sell a house.
You have more time to plan and get an accurate estimate of your potential profit or loss. It may not be the right time to sell if the market value of your house isn't sufficient to cover the selling costs. Do your math and weigh all options.