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How to Sell a Property When You Still Owe Money On It

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When you first qualified for your mortgage and bought your home, you were probably over the moon with excitement. Mortgage repayment generally runs from fifteen to fifty years, but in those first few heady days, you likely were more focused on moving in and enjoying your home. 

Eventually, most people have to sell their home for one reason or another, and often that loan is still on it. This might be because of a divorce, a new job, the desire to relocate for retirement, because of an expanding family, the need for more space, or even because of a financial hit. It might be as simple as the realization that the house isn’t right for you. It might be that the neighborhood was rezoned and now there’s a strip mall right behind your back garden. Whatever the reason, the mortgage isn’t cleared and the property needs to be sold.

Most homeowners don’t own their homes

Here’s something you might not know: if you still owe money on your home, you don’t actually own your home. It’s true! Until a mortgage is paid off completely, the lender technically owns the house. Whatever mortgage lender you financed your house through is the legal property owner. 

Legally speaking, a mortgage is the transfer of interest in a piece of real property to secure repayment of money. Your lender is securing the payment of the money you’ve promised to pay back to them through ownership of the property itself.

If a home loan falls into default because of missed payments, they can call up the secured asset; your house. That’s why when someone’s home goes through foreclosure, they are subject to the eviction process just like a landlord evicts a tenant. The lender repossesses the home just as a car lender can repossess a car. The difference of course is that the house can’t go anywhere, so the person living there has to go somewhere. 

The mortgage holder/homeowner relationship isn’t legally all that different than the tenant/landlord relationship. What a strange thing to realize!

The great news is that it’s not cost-effective for a mortgage lender to foreclose on a home. They are much more likely to lose money this way than if they can keep a homeowner in their home. It’s also a better deal for a lender if the house can be sold prior to foreclosure.

If you want to sell your home while owing money on it, the lender will have to sign off on the sale.  

Understand your mortgage payment

Though you might already know off the top of your head the buying price of your home, keep in mind that a mortgage is much more than that. Unlike rent, which is the full cost to live in a house and its straightforward, a home loan has lots of components. 

Mortgage payments include lots of different things.

– Principal
– Interest
– Taxes
– Insurance

The principal is the actual amount of the home. This is where you put equity into the house, where you’re paying down the price of the home. Interest is the fee that you pay the lender for allowing you to use their money. Taxes are the local fees that the government takes. Property taxes are built into every mortgage. 

Finally, there is insurance. Homeowners’ insurance covers damage to the home or accidents that happen to people on the property. That’s included in every monthly payment for every homeowner. Unless you put a significant amount of money into the down payment of the home, you’ll also likely have mortgage insurance to pay. This is a safeguard for the lending company for risky investments.

Principal and equity

home equity piggy banks

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All of this adds up to mean that the full amount of your monthly payment doesn’t go to that sale price that you paid for your home. On the contrary, depending on the interest rate that you pay on your home loan and on other fees, you might end up paying as much as one quarter to one third of the sale price on top of the principal. 

Note that early on in the life of your mortgage, you’ll be paying more on interest and less on principal. The first five years of payments are much different than the last ten or twenty-five in terms of breakdown. 

Equity is the amount of principal that you’ve paid off on your mortgage. The more equity you have in your home, the higher percentage you own rather than the bank owning.  

Determine what you owe

Your mortgage statement will have a breakdown of everything that’s included in your mortgage payment. If you want to find out how much you need to pay the lender to clear the mortgage, you’ll have to request a payoff amount. 

This is a common request that mortgage lenders get all the time. If you have an online platform that you pay your home loan through, you should be able to get a payoff amount through an automated system. This might take a couple of days. The payoff amount is guaranteed for a certain amount of time, usually thirty days. 

Know your home selling options

sale of property

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If you haven’t paid off your mortgage yet, you can still sell your home. 

Your selling options are all about getting more for your home than what you owe on it. That’s why it’s important to know the payoff amount. 

The lending company wants to know for sure that they’re going to get their money back. That’s really all they’re interested in. If they’re sure that they’re going to get the amount loaned to you back out of the deal, they’re more than happy to allow the sale to go through. 

If you work with a cash buyer, a real estate agent, or a real estate attorney, those experts will be able to tell you what you need to know about selling your property. They can work with the holder of the loan and with a title company to get the closing documents together ahead of the closing date. You might also need a settlement statement or a proof of funds document depending on the regulations in your area. 

Many buyers have ways to make financing work, through a lease option or a contingent offer deal with the person selling their current home. Even if you have a second mortgage or an old house, you might still be able to cover the remaining amount on your loans. Never hesitate to get professional help from a tax expert or a real estate agent if you are unsure of your loan terms or the affect the sale will have on your credit.

You can sell your property with a mortgage on it to a cash buyer or to a buyer with a lender. A seller financing deal can help to satisfy the mortgage lender and pay off the loan balance. It doesn’t matter to the mortgage company as long as they have a guarantee that they’ll get repayment. 

When a home loses value

The real estate market tends to trend up. This is why real estate is considered such a great investment. However, there are always factors that can change that. 

For instance, remember the house with the strip mall from the beginning of this blog? Rezoning and new construction of commercial buildings can reduce the value of a home. Needed repairs, devastating natural disasters, etc. can also cause the price of a home to go lower than the mortgage cost. 

If you’re not able to sell the home for more than the amount owed, sometimes a mortgage holder will allow another buyer to assume the debt under the same terms. They’ll have to meet income requirements and go through a credit check just as if they were qualifying for a mortgage. 

You might also be able to work out a seller-financed deal to cover the mortgage debt. A bridge loan is another option if you can’t reach the mortgage payoff amount with traditional financing. You’ll want to seek out professional help for all of these options.

Selling a house with a mortgage

house with mortgage payments

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How can you sell a property with a loan on it? It’s actually pretty straightforward assuming you can sell the home for more than you owe on the loan.  Closing costs are a consideration, even for sellers working independently of real estate agents. Today’s market is generally favorable to sellers, so a traditional lender is usually more than willing to avoid short sales or foreclosure in favor of a sale.

Once the house is sold, the money from the sale is used to pay the mortgage company the remaining balance. This lets the homeowner walk away and pocket any leftover cash. Most mortgages are structured so that selling your home to a buyer with good credit and a bank to finance their new loan is an easy sell for mortgage lenders.

Having an existing finance agreement on your home doesn’t mean you can’t sell it. It just means working with the right people to help you sell a property with a loan on it.

Brett Riggins

Brett Riggins

Founder of Connect Home Buyers Brett Riggins started his real estate journey after graduating from Western Michigan University in Construction Engineering. After completing his first few residential flips, him and his wife Arin started Connect Home Buyers LLC, and today, they help homeowners sell their property quick and hassle-free.

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