Can You Sell Your House Before Paying Off the Mortgage?

After the global pandemic allowed people the luxury of working from home (rather, necessitated it, but we’re choosing to look on the bright side of working in pajamas), people were able to travel and dream of where they’d want to live next, no longer tied down to their office. The real estate market soared with people buying and selling their houses at an incredibly fast turnaround, and it presented an opportunity for people to pursue a home in their dream location. 

However, it’s also led to questions: What do you do with your current mortgage? Are you able to move to another home before you pay off your mortgage? The answer is YES, you’re able to move no matter how much of the remaining mortgage you have, but sometimes it’s a better idea than others. Let’s walk through the basics of the selling process before paying off your mortgage and how to determine which strategy is best for you. Generally, most home loan terms last for 30 years. There’s no need to wait three decades to make a change and start living your best life. Few people do, so why should you?

Step 1: Determine Loan Balance

First things first, it’s important to know how much you owe your mortgage lender, otherwise referred to as your mortgage payoff amount. This is one of the primary factors that will dictate the listing price of your current home and your budget for the next. The key to staying financially afloat, in the “green” so to speak, is to maintain a balanced equity, i.e. don’t plan to purchase a home with a larger mortgage than what you currently owe. Make sure you’re up to date with all your mortgage payments and once you know your loan balance (which has accumulated interest from when you initially received the loan), you can plan on using the money from the home sale to pay off your mortgage if your house is worth more than what you owe the bank. 

Check your loan paperwork for due-on-sale clauses and prepayment penalties. Due-on-sale clauses are stipulations that help protect your mortgage lender by essentially requiring you to pay your loan in full after selling your house or transferring the deed. If this is the case, they will want the loan balance paid off before somebody else moves into the property. If you sell your house first without paying off your mortgage, there might be a prepayment penalty. Nowadays, these penalties are less common and some only cover a specific time frame (like if you sell within four years of buying). The cost of this penalty varies and can be a fixed rate, a percentage of your remaining loan balance or a percentage of owed interest.

Note: You only need to inform your mortgage lender that you intend to sell your home when you’ve accepted an actual offer on the property. Your lender will have little to no say on who you sell your house to—they are only entitled to ask for proof of funds or preapproval. As long as your buyer gets preapproved for a mortgage loan, everything should transfer without hassle.

Step 2: Work with Agents to Configure an Estimated Settlement Statement

After figuring out your remaining loan balance, it’s time to find a real estate agent who will put your house on the market at a price that will ideally cover your home loan. They’ll also open an escrow account for you—a place to keep money and documents to make the sale official. A title agent is also important to help transfer your house’s title. Inform your title agent of the amount you still owe your lender and your account number. 

Once the real estate agent opens the escrow account, they’ll be able to take a look at it and give you an estimate of the closing costs. Though this can change depending on what the house sells for and the timing of the sale, this estimated settlement statement will give you a better idea of how much money you’ll get to pocket for future investments. After signing all the necessary paperwork for the deal’s closing, the title agent can send off your final mortgage payment and legally transfer the title to its new owners (who make their first payment to this escrow account). 

Possible Setbacks

As stated above, the most ideal situation would be selling your house first and using the profits to pay off your mortgage. It’d help cover commissions, fees and closing costs (taxes, attorney fees, etc.) and hypothetically leave you with some money to either put in savings or invest in your next house. But what if you owe more than your house is really worth? Unfortunately, in some cases (less than 10%), you won’t be able to rely on selling your house to cover your mortgage. What then? 

Your other options are to refinance, to pay the lender in cash at closing (only if you can afford to pay out of pocket), or to hold off on selling in order to gradually pay your debt. Though this may reduce your credit score and negatively affect the chances of you buying a home in the future, you can also request a short sale—where the lender agrees to lessen the amount owed to help you sell your house. Often only done when the lender fears foreclosure, short sales typically have the house priced below market value. The lender may even require an all-cash offer as well to get out of the investment ASAP.

Selling Mindfully with a Mortgage

Remember, you’re responsible for your mortgage until the sale officially closes. Your settlement statement, otherwise known as the closing statement, will have an itemized list of expenses, detailing who pays for what and your net profits. Review this settlement statement carefully to see how your mortgage is being handled, especially whether payments are being paid as they usually would or if they’ll be accounted for at the closing table. Your mortgage doesn’t have to be a problem when selling your house and finding your next. Weigh your options, plan with an agent and cheers to your next adventure!