If you’re planning a move but still have a mortgage on your house, the idea of selling your home may seem intimidating. Luckily, you can sell a house with a mortgage. In fact, most people do.
According to the National Association of Realtors, the median length of homeownership is 13 years, and most mortgages are 15- to 30-year loans. This means that the majority of people sell their homes with a mortgage.
But just because lots of people do it, doesn’t mean it’s a good idea for you. You’ll need to consider several factors to determine whether selling your house with a mortgage is the right decision for your financial situation.
Sellers often forget about additional expenses, like agent commissions and closing costs, that can significantly limit the profits of your home sale. So, it’s important to understand the full financial picture before committing to sell your mortgaged home.
Realtor commissions account for the largest cost to sellers when they close, so paying a lower commission is a strategic way to save when selling your house with a mortgage.
What Happens To a Mortgage When You Sell Your House?
When selling your house with a mortgage, you’ll use the proceeds to pay off your outstanding mortgage balance.
Just before closing, the buyer deposits the purchase price and their share of the closing costs into an escrow account. The money will remain in escrow until the transaction is complete.
After the deal is closed, the escrow company transfers the payoff amount to your mortgage company to terminate your mortgage.
What Happens to Equity When You Sell Your House?
When you sell your house, you’ll receive the remaining equity as cash in your pocket, less any closing costs and other expenses.
Home equity is the difference between the market value of a home and your outstanding mortgage balance. If you have additional debts secured by the home (such as a home equity loan or HELOC), this amount is also counted against their equity.
Should I Sell My House With a Mortgage?
In general, you should only sell a mortgaged house if you have sufficient equity.
Remember, you’ll need to cover the mortgage payoff amount, agent commissions, and some closing costs that ultimately come out of the sale proceeds. If you don’t have enough equity to cover these expenses, you’ll be on the hook for any remaining costs and must bring cash to the closing table.
To make the best decision for your financial situation, we recommend reaching out to your lender to learn your mortgage payoff amount. From there, you can use a home sale calculator to find out how much you’ll actually earn (or lose) after closing day.
🏡 What is a Mortgage Payoff Amount?
The mortgage payoff amount is how much money you owe to satisfy the terms of your loan. In addition to any loan balance you haven’t yet paid, it may include interest or other fees.
How to Calculate Your Home Sale Profit
It’s difficult to predict exactly how much money you’ll make when selling a house with a mortgage, but you can get a pretty good idea with this basic equation:
Approximate Home Sale Proceeds = Market Value of Your Home – Cost to Sell
The cost to sell your home includes several key factors, notably your:
Mortgage payoff amount
Estimated closing costs
For example, if a homeowner sells their home for $300,000 with a $200,000 mortgage payoff amount, the proceeds may look like this:
Mortgage Payoff Amount
Broker Commissions (Standard 6%)
Estimated Closing Costs (2.6%)
Realtor commissions can take a chunk out of a homeowner’s profit — and the damage is even more noticeable if you have to pay off your mortgage.
🤔 Do I Have to Work With a Real Estate Agent?
It’s possible to sell a home without the help of a listing agent – also known as for sale by owner or FSBO. But it can be a lot of work, legally risky, and may not result in the kind of savings you’re looking for. On average, homes represented by a listing agent sell for about 26% more than homes marketed solely by the owner.
That said, if you’re willing to put in the time and effort, it’s worth doing the math to see if selling without a realtor might help you save.
What Happens if You’re Underwater on Your Mortgage?
If you’re underwater on your mortgage, it means you owe more on the loan principal than the home is worth on the open market.
This may be the result of missed mortgage payments, or a decrease in property value due to market conditions or a low appraisal.
Luckily, there are a few ways to get out of this situation, including a short sale.
If you opt for a short sale, you’ll be on the hook for paying the difference between the outstanding loan balance and sale price — and covering commissions and other closing costs.
Alternatively, you may qualify for the Freddie Mac Enhanced Relief Refinance program or Fannie Mae’s equivalent, a high loan-to-value (LTV) refinance.
How To Sell a House With a Mortgage
Step 1: Review Your Finances 💸
Start by finding out how much equity you have in your home so you can estimate the profits.
Contact your lender to request the payoff amount for your mortgage. The payoff amount will also inform how you price your home to earn a profit — and how much you’ll have available for a down payment on a new home.
While you’re at it, you should check your credit score before listing your home. Depending on your moving timeline and how much you plan to spend on a new home, you may need to apply for a new mortgage in the not-so-distant future. Checking your credit score early in the process can give you the opportunity to pay down existing debts and dispute errors with credit bureaus.
Step 2: Prepare the House To Sell 🔨
Once you decide you’re ready to sell, prepare your home to maximize its marketability and increase profit.
This may involve painting, replacing worn carpet, decluttering, or addressing issues caused by deferred maintenance.
If you’re working with an agent, they can provide helpful insight into what homebuyers are looking for in the local market and what improvements are most impactful when it comes to price.
Step 3: Interview Agents 🕵
Shop around for experienced agents who know the local market well.
We recommend looking into any potential agent’s sales record in your area and experience with homes of your size and price point. Also ask potential agents about their marketing strategy for your home and what they consider an appropriate list price.
A great agent can also help you negotiate a price that will optimize proceeds even with an outstanding mortgage.
Seller’s agents typically charge a 3% commission that — in addition to a 3% buyer’s agent commission — comes out of the sale proceeds. However, there may be some room for negotiation, especially if the agent thinks the home will sell quickly or if you have a luxury home with a large price tag.
Step 4: Set a Price 💲
Select a list price that covers your mortgage balance, commissions, and closing costs while still yielding a profit. The list price should also be consistent with comparable sales in the area while remaining competitive.
Choosing a list price can be extremely difficult for a homeowner, but an experienced local real estate agent can review comparable properties in the area to arrive at a competitive but realistic number.
Step 5: List and Market the House 🏠
If you’re working with an agent, they will arrange listing photos, write an enticing listing description, and post the home on the local Multiple Listing Service (MLS). Experienced realtors also notify other local agents and buyers who they think may have interest in the home. If necessary, your real estate agent may also schedule a brokers’ open house or public open house to get your home in front of qualified buyers quickly.
Marketing is especially important when trying to sell your house with a mortgage because it can help you get the highest possible sale price and maximize proceeds. Ideally, marketing efforts will pay off and there will be enough interest in the home to get close to list price or even above, depending on the market.
Step 6: Accept an Offer ✅
If your home generates sufficient interest, you’ll receive one or more offers — ideally, at or above the list price.
Consider your mortgage payoff amount and other expenses, then work with your agent to negotiate and accept an offer that meets your needs.
Your real estate agent will also provide necessary support as the buyer moves through the due diligence process. Ultimately, this may require making repairs based on inspections or renegotiating the contract price. Remember to balance the goal of optimizing proceeds against selling the home quickly so you can take out your equity and move on to a new home.
💡 Remember: Don’t Neglect Mortgage Payments In the Meantime
Continue making mortgage payments until you get a payoff statement from your lender. During escrow, you’re still responsible for your mortgage payments – not the buyer.
Step 7: Close 🎉
When it’s time to close on the real estate transaction, review the settlement statement to confirm final numbers.
Relevant information includes the sale price, mortgage payoff amount, closing costs, and net proceeds. The settlement statement also details how much each party will receive upon closing — including the seller and their mortgage lender.
The escrow company receives funds and directly pays the lender, so you don’t have to manage this portion of the sale even if you’re not working with a realtor. Still, working with a seller’s agent can dramatically simplify the closing process and ensure everything goes smoothly.
FAQs About Selling Your House With a Mortgage
How Soon Can You Sell Your House After Buying It?
You can sell your home at any time, but experts recommend waiting at least two years after buying it. Waiting two years helps homeowners avoid capital gains taxes under the two year ownership and use rule— also known as the two-in-five-year rule. This period may also give the home time to appreciate so a homeowner is more likely to break even or make a profit when reselling the home. Find out how much you could make selling your home right now.
Can You Sell Your House With a Reverse Mortgage?
You can sell your house with a reverse mortgage, but you will have to pay off the entire loan balance, including interest and fees. In fact, if a maturity event triggers mortgage payoff, you’ll be required to sell the house or pay off the balance in full. Maturity events may include falling behind on property taxes, insurance, or HOA fees. Learn how to sell a house with a mortgage.
Is There a Penalty for Selling an FHA Home Early?
There is no penalty for selling an FHA home early because the Federal Housing Administration does not charge borrowers prepayment fees. However, homeowners who want to sell their FHA-financed home while underwater on the loan must cover the deficiency at closing. Learn what happens to your loan when you sell your house.