Can I sell my home if I still owe on my mortgage?
What to know about home sales and mortgages
- Your lender does not dictate when or to whom you can sell your home.
- Typically, you must pay off your mortgage before transferring the property title.
- If your mortgage is underwater, wait to sell, or talk to your lender for options.
- Check your mortgage payoff balance and any associated prepayment fees.
Most homeowners have a 15- or 30-year mortgage, but living in one place for decades is increasingly incompatible with modern lifestyles. When you sell your home, what happens to your mortgage?
A mortgage is a loan secured by your home. As such, your lender holds the first lien position on the title for the mortgage owed. Liens must be removed before titles can transfer. You — not your lender — decides when to sell your home and who can buy it. So long as the prospective buyer can obtain financing, your lender generally will have no qualms with the deal. If, however, you decide to sell your home for less than you owe, your lender must give express approval for the deal to take place.
Due on sale vs. assumable mortgage
When selling a home, your mortgage typically is affected in one of two ways. Most mortgages include a clause that requires borrowers to pay the mortgage in full when they sell, referred to as a due on sale clause.
An assumable mortgage allows buyers to take over an existing mortgage along with the house. If a mortgage has a due-on-sale clause, it is not assumable. Assumable mortgages are only available on a short list of mortgage types, but might be an option to consider. This was a common practice during the days of high interest rates, when buyers could save money taking over an existing mortgage that had an interest rate lower than that available on the market at the time of the sale. Lenders eventually started adding due-on-sale clauses to ensure they obtained the higher interest rate.
Mortgage payoff and penalties
Before you consider selling your home, it is wise to check with your mortgage holder to see how much it would take to pay off your mortgage, and whether there are prepayment penalties. Knowing your current mortgage payoff amount helps you price your home.
It is equally important to know if your mortgage has a prepayment penalty, and if so, if there is a time limit associated with it. Lenders may include penalties as a way to guarantee they achieve a certain profit off of interest. A prepayment penalty typically comes into effect if you pay off your entire mortgage within a set period of time, usually within three years. They are typically structured as a flat fee or a percentage of your outstanding mortgage balance.
If the prepayment fee is prohibitive, you may consider waiting to sell your home until the penalty falls. You can also call your loan officer to attempt to negotiate a reduction.
If you owe more than the home is worth – referred to as being underwater – it is still possible to sell your home, but the process is more complex.
The safest option is to postpone the sale until things balance out. If the market is good, the home value may appreciate, and your payments help with that balance. Repairs or inexpensive remodeling might also help.
If you can’t wait, you may want to contact your lender to discuss a potential short sale, where you sell your house for less than what you owe and your lender waives the difference. Your lender must agree to this arrangement. If you try to short sell without notifying your lender, they may start foreclosure proceedings, despite the sale. Also note that short sales and foreclosures do significant damage to your credit.
When you get an acceptable offer on your home, inform your lender of your intention to sell. Once you have completed all the closing paperwork, the buyer’s mortgage is transferred to the title company. The title company ensures your mortgage is paid off, and then pays you any remaining balance from the sale — minus fees. The property title is transferred to the buyer, and the sale is complete.