If you are selling your house but haven’t paid off your entire mortgage yet, you may have questions. It is very common for this to happen, and the procedure to take care of everything is easy and straightforward. In fact, most of it is handled by someone else. In this article, I will explain the mortgage payoff when selling a house process.
Did you know that about 65% of Americans own their home, and of that, about 40% are mortgage-free? Since the majority of home loans are for 30 years, what happens when you decide to sell before you have paid off the house? Who writes the check for the pay-off? How does it all happen?
Most people move every 5-7 years. So if you have a 30-year mortgage and you have been making your monthly payments, you haven’t paid off the house yet. Here’s what happens to that balance.
Is it possible to sell my house if I have a mortgage?
First of all, YES, it is possible to sell a house if it has a mortgage.
Do you remember all the papers you signed when you bought the house? In that packet, there was a page that said that the bank or company that holds the mortgage has a first lien position. This means that when the house is sold, they get paid first. (There are also second, and third positions, but that is another article.)
Over time, it is common for your house to appreciate in value. At the same time as you make your mortgage payments every month. When you go to sell your house should be worth more than it was when you bought it. Possibly $10’s to $100’s of thousands of dollars of profit.
Unless your home is completely paid off you don’t get all this money.
The balance you have left to pay on your mortgage (The Payoff Amount) gets paid first.
If your mortgage balance is more than the value of your house this is called a short sale. That’s a different process.
How does your mortgage get paid off when you sell your house?
In addition to your real estate agent, there are other parties involved in the sale of your home. A major player is a title or escrow company. They handle the majority of the paperwork for the sale.
In addition to handling the actual title transfer, the title company also finds out how much money you owe on the actual sale date. This payoff amount changes every time you make a mortgage payment.
On the contract date, the day the new buyer of your home closes, they actually give the money to the title company, who holds it in an escrow account.
On a side note, any other money paid during the sale process, like earnest money, goes into this same account.
Then on the sale day, the money gets disbursed or distributed to the appropriate parties in the transaction.
The order of payments can change, but it usually goes like this:
- The bank that holds the mortgage (mortgage payoff when selling a house)
- Outstanding property taxes (if any)
- Outstanding liens from lawsuits or judgments (if any)
- Any HOA fees
- The Title Company, Attorneys, or Escrow companies involved in the process (closing costs)
- The real estate brokers or agents in the transaction
- Any balance remaining is your Profit!
Do you have to pay off your mortgage when you sell your home?
Yes, you need to pay off your mortgage when you sell your home. your Lender has a note that specifies they get paid first if the house sells. Before anyone else.
This is because once the house sells, there is no longer any collateral for the Bank.
The process appears automatic, and in actuality, you probably already agreed to it when you were buying the house. It was part of the original loan package, and all the papers you signed when you purchased the property. There isn’t anything you can do to change it.
As long as you have been making your monthly payments on time, the bank can’t force a home sale. You are protected that way.
Additionally, if you also have a second mortgage or a home equity loan (HELOC), those will get paid at the same time as the first note.
Is it better to pay off the mortgage before selling?
There is no need to pay off the mortgage loan before selling. In fact, for most people it is impossible! The average balance on a current mortgage is over $215,000! Who has that kind of money available?
Instead, the process is set up so that on the closing date the old mortgage gets paid (that’s your mortgage), and a new home loan gets started (for the new owner).
Paying off your mortgage is something all homeowners want to eventually achieve. Who doesn’t want to own a house free and clear? But mortgage debt isn’t necessarily bad. Be sure to carefully examine your personal finances or talk with a financial counselor if you have questions.
How do you pay off the mortgage at closing?
The closing is the time when everyone signs all the paperwork to buy the house and transfer the title.
If you have been making your monthly payment and are current on your mortgage, you probably have a lower mortgage payoff amount than when you bought the house. The house has made a profit, due to your payments, upgrades, and appreciation over time.
When selling, the buyer of the house pays the seller. But the payment isn’t direct. It goes through an escrow company, There are stand-alone escrow companies as well as title companies that handle escrow.
This part of the real estate transaction can seem like a magic black box, but there is a person behind it all. That is the title agent or escrow officer. They make sure that each party is financially doing what is needed for the sale. They prepare a settlement statement that shows all the different fees and costs associated with the sale. One of the line items on that statement is the payoff amount. It is usually near the bottom of the 2nd page of the ALTA statement.
This is the payoff quote that your mortgage company provided based on the actual date of title transfer.
That amount comes out of the total sale price of the home before you get any.
This amount of money can change day to day, so it is important to close on time. Otherwise, everything needs to be re-calculated.
How to Calculate Mortgage Payoff When Selling a Home?
The easiest way to see your payoff amount for your house is to look at your monthly statement. This will have the mortgage balances written on it. But this number is only approximate. To get the exact amount, the first thing you should do is to contact your mortgage company and tell them what day you will be closing. There may be some fees in addition to the remaining loan balance and equity. Most mortgages do not have a pre-payment penalty but check your paperwork carefully if you have questions.
Selling a house with a mortgage example.
Here is a fictional example of selling a house with a mortgage balance. Let’s say you purchased the home for $150,000. When you bought your house you put down 10% which was $15,000. So the balance of your mortgage was $135,000 + Interest.
Now it is 7 years later. You have been making your monthly payments on time, and even paid a little bit more some months when you had some extra money. The balance of the loan is now $90,000
You decide you want to sell so you contact your real estate agent. They say the house is worth $325,000 since you live in a popular area and have done some nice upgrades to the house.
So you put the house on the market. After a few showings, you get an offer for the full price.
The buyer applies for a new mortgage and after 30 days everything is ready. To you, their down payment doesn’t make any difference.
You go to a third-party closing company to sign all the papers for the transfer.
The escrow officer has contacted your lender and learned that the exact payoff is $91,150.
Plus there are some transfer fees that you negotiated with the seller that amount to $2,725.
So:
$325,000 (sale price) – $91,150 (payoff amount) – $2,725 (transfer fees) = $231,125
The good news is that you will get a check from the title company for $231,125 for your old home at the closing table when it is all done.
Most people use the proceeds of the sale to make a large down payment on their next home.
How soon after buying my home can I sell it?
There is no law that I know of that says you have to wait a certain period of time before you can sell your home after you buy it.
However, your lender may have some requirements written into your paperwork that limits the time you can sell.
Usually, this is only 1 or 2 months, however.
I have seen examples where somebody buys a new construction house. They agreed on a sale price and put a down payment to the builder. After 9 months of construction, the house was ready. Because this was a hot area, the other homes around it were selling for more than the original contract price. The builder had to honor the original price, so essentially the buyer had positive equity on the closing day. They then contacted a real estate agent and put the house on the market for more. It sold in just a few days for more than he paid for it that same week.
What if my house is worth less than when I bought it?
If you live in an area where the value of your house is less than you paid, you have negative equity. Normally people don’t sell in these situations but there may be a circumstance where you have to (job transfer, divorce, personal reasons).
First, ask your real estate agent what they believe the house is valued at. You will get a comparative market analysis that shows what other homes similar to yours, and near yours have sold for.
If the value is less than the balance on your current home, then you will need to bring money to the closing table. You need to give the mortgage company enough money to cover the balance of your note.
This can affect potential buyers because now you are in two legal contracts. One to the bank, and a second to the person buying your home.
Hopefully, you have enough money in the bank. If not you may need to get some money from a family member to cover the difference
It’s a good idea if at all possible to wait to sell in these situations until you have enough equity.
FAQ
No, you don’t need to tell your lender that you are selling your house. However, you do need to contact them to get the exact payoff amount. Then when you receive the proceeds from the sale, you can simply pay the lender the entire amount and be released from the note.
Maybe. Do you own the house outright? If you own your home, then yes, you will get all the money when you sell. If there is a mortgage, any liens, or outstanding tax or HOA balances, those will all be deducted from the profits first. There may also be closing fees your real estate agent negotiated you are responsible for.
Yes. But – this will depend on your financial situation. Do you have a down payment? How about your income? Can it support two house payments? What does your credit score look like? If you want to buy a new or 2nd house contact a lender to see what options you have.
It’s possible to buy and sell at the same time. You complete the sale of your old house before (even a few hours) you sit at a closing table and sign papers for your new house.
Final Thoughts
Selling a house can be very profitable. There is usually a mortgage payoff when selling a house that has to be calculated. This remaining balance will get paid before you see any profit. The first step is to look at your monthly mortgage statement to see an outstanding balance. This is just an estimate, however. The total amount may be different because of any fees, or agreements in the sale contract.