Can You Sell A House With A Mortgage? Everything To Know

There are lots of reasons to sell a home. Maybe you need more space, want to downsize or you’re facing a job relocation. But what happens when you still have a mortgage on the home you need to sell? Can you still sell? And what if you owe more on the mortgage than the house is worth?

Let’s find out whether you can sell a house with a mortgage and discuss what the selling process looks like with a remaining mortgage balance.

Can You Sell A House Before Paying It Off?

Yes, you can sell your home even if it has a balance on the existing mortgage. In fact, this is commonplace. Aside from refinances, it’s probably the most common way to pay off a home loan. That’s because more homeowners have a mortgage than own their home outright. Most people don’t stay in their mortgages long enough to pay through the end of the loan.

When you sell your home, you can use your equity to pay off the loan balance and any seller closing costs. Know that prepayment penalties may apply, depending on the terms of your existing mortgage and how soon you sell. Our friends at Rocket Mortgage^® don’t charge prepayment penalties, but if you have any doubt, check with your lender.

How To Sell A House With A Mortgage

If you’re looking to sell a home with a mortgage, take the following steps to make sure you’re prepared.

1. Get A Payoff Quote

A mortgage’s payoff amount is the amount owed on the loan. To get it, you contact your lender prior to your home sale. Rocket Mortgage clients can sign in to their account and find their mortgage payoff amount easily on our website or by phone during our business hours.

Your payoff quote includes several key pieces of information – including the total amount you owe and a breakdown of any fees. The quote will also list the date on which it expires. This is important because if it expires, you’ll have to get a new one.

The payoff statement will also list the interest due between the date the payoff quote is generated and the expiration date. If you still have mortgage insurance on the loan, you’ll need to pay that as well. You’ll also need to rectify any escrow shortage. Because of interest and any fees, your payoff quote may not match exactly with your mortgage balance.

Getting your payoff quote before listing your home is essential because you’ll know exactly how much you owe. If you have any doubt, you should also confirm the expiration of your payoff quote with your lender. Although, it should be clearly listed on the quote itself.

2. Determine Your Home’s Equity

Home equity is the difference between the market value of your home and the outstanding mortgage balance, along with other liens. You can use home equity to help pay off the outstanding balance in the sale along with closing costs.

There are two different ways you can gain equity:

• Earned equity: Earned equity is gained from making your mortgage payments every month. With every mortgage payment, you pay off a little bit more of your principal. Early in the life of the loan, more of the payment goes toward interest, but that balance flips later on and more sizable amounts are put toward the principal, directly bringing down the balance.
• Home investment equity: This type of equity rises and falls with the value of your home. It’s all based on market conditions and the perception of your home relative to that of comparable properties around you. Because market value plays a role, you may have more or less equity than you would if it were based on your mortgage payment alone.

Your total home equity is the sum of your earned equity and your home investment equity.

3. Pay Off The Mortgage Balance

If you have a mortgage on your home, it occupies the first or primary lien position. This means that the mortgage is the first thing that’s paid off in a home sale. The funds for the mortgage payoff go directly to the mortgage lender.

4. Pay Off Additional Loans And Liens

After the mortgage is paid, any other loans and liens on the house get paid off out of the sale proceeds. These include other lending products like home equity loans (also known as second mortgages) and home equity lines of credit (HELOCs).

Also paid off at this point are any other liens on the property. For example, a lien could exist from work done on the home that isn’t yet fully paid off. Tax liens are also paid off.

5. Cover Transaction Fees And Closing Costs

After all liens are paid off, transaction fees and closing costs are deducted out of the sale proceeds. There are costs like deed recording fees or agent commissions.

Sometimes, sellers pay for the owner’s title policy. Title insurance covers the new buyer if someone comes along with a claim to the property in the future.

Most of these fees are negotiable. Being flexible on seller concessions can allow a quicker sale or a higher price.

6. Keep The Home Sale Proceeds

Once everything is paid off, the rest represents the home sale proceeds and can go directly in your pocket. If you're buying your next home, this amount could go toward a down payment. Or, depending on your situation and the amount of proceeds, you can use the money toward other expenses or financial goals.

Can You Sell A Home With Negative Equity?

Having negative equity means you owe more on your home than it’s worth. This is sometimes referred to as being underwater on your home.

Here’s a quick example. Let’s say you owe $250,000 on your home, but the home is only worth $220,000. You have negative equity at that point. A sale at market value wouldn’t cover what you owe.

If you’ve got an underwater home and you need to sell, a short sale may be your only option. Let’s run through that and how it works.

How Short Sales Work

Short sales are a process in which you sell a home for less than you owe on the mortgage. A lender has to approve a short sale because they’re not being made whole on the loan. They’re likely only to do this if you’re in imminent danger of default. You have to be facing some sort of financial hardship.

A short sale should be considered a measure of last resort. It’ll hurt your credit similar to a foreclosure or deed in lieu. The advantage here is that you’re in control of the process rather than having your house foreclosed on. If you have a short sale, it can cause difficulty if you’re trying to get a mortgage in the future.

Short sales are certainly not great for sellers. But short sales can attract a motivated buyer because they may be able to get a slight deal. However, it’s still to the buyer’s advantage to offer as close to market value as possible. That’s because the bank will be trying to recoup what they can.

Selling A House With A Mortgage: FAQs

Here are some frequently asked questions about selling a house with a mortgage.

What happens when I sell a house with a mortgage?

Typically, when you sell a house with a mortgage, you’ll use the home sale proceeds to pay off your remaining loan balance and closing costs. Many sellers use the remaining money toward the purchase of their next home or another investment.

Can you transfer a mortgage to another house?

Transferring a mortgage to another house is possible. It’s called mortgage porting, and it’s only allowed by certain lenders. Porting consists of selling a house, paying off the existing mortgage and then maintaining the same mortgage terms on the new home loan. 

What is a mortgage prepayment penalty?

Some lenders charge a mortgage prepayment penalty if you choose to pay your loan off before the loan term expires. It typically equals 2% of the seller’s outstanding balance on the mortgage. As a reminder, Rocket Mortgage never charges prepayment penalties.

The Bottom Line: You Can Sell A House With A Mortgage

Selling a house with the mortgage still on it is the most common way to do it. The proceeds from the sale cover what you owe as well as transaction costs. Any profits made from the sale can be used to buy a new house, stored in savings or used to pay off other debts.

Are you looking to sell your home? Start the selling process with Rocket Homes^SM to benefit from the expertise of a Verified Partner Agent.