Partner has made a fraud in the contract of sale and being handed a cash and pen to the businessman … [+]
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These days, most people don’t end up staying in their homes until their mortgage is fully paid off, which can lead many sellers to wonder if they can sell their home when they still owe money. The simple answer is yes, but if you’re one of those sellers, keep reading. Below is an explanation of what happens to your mortgage when you sell your house.
What happens in a typical sale
Put simply, in a traditional sale, you should be able to sell your home for more than what you currently owe on your mortgage. If you’ve been paying down your mortgage over the years, you’ll have built up equity in your home, which you can cash in on when you sell.
When a home goes to closing, between the down payment and the mortgage loan, the buyer brings funds to settlement that are equal to your home’s sale price. Those funds are then used to pay off the following:
- The remaining amount of your mortgage
- Any home equity loans or HELOCs that you may have
- Your closing costs (agent commissions, taxes, etc)
If there’s any money left after those debts are paid in full, the remainder is paid out to you as a profit. You can then use those funds to finance the down payment on a new home or however you see fit.
What happens in a short sale
A short sale occurs when the home is worth less than what you currently owe on the mortgage. Here, as the owner, you’d have to talk to your mortgage company and ask them to accept a loss since the proceeds from the sale of the home will be less than what they are owed.
In a short sale, the selling process works a bit differently. Instead of you having the final say on whether or not to accept an offer, you have to get approval from your lender before moving forward. This can often slow down the process quite a bit. However, it’s a attractive alternative to having to continue to make payments on your mortgage even after you sell.
What happens when you buy and sell a house at the same time
If you sell first
By all accounts, if you’re trying to buy and sell a house at the same time, selling first is the easier way to go. With this method, you’ll receive the payout from selling your old home, which you can then use to make the down payment on your new home.
If you buy first
If you buy first, the important thing to realize that you’ll have to work a little harder when arranging the details of both transactions. In this case, you won’t have the funds from your sale readily available to cover the down payment and closing costs for your new home, so you’ll have to have to lean on one of the following options to make the financing work:
- Use a home sale contingency: When you write up an offer on your new home, you have the option of including a home sale contingency. A home sale contingency effectively states that you need to find a buyer for your old home before you can settle on the new one. If you’re unable to find a buyer, this clause gives you the right to exit the contract. However, keep in mind that while using this contingency is an option, it may make your offer less appealing to sellers.
- Get a bridge loan: A bridge loan is a short-term loan that can be used to help you pay off your old mortgage and make your down payment on your new home. Then, when you sell your old home, you can use the funds from the sale to pay off the bridge loan.
- Carry two mortgages: While it may not sound fun, if you can afford it, the simplest option may be to carry two mortgages until you can find a buyer for your old home. That way, you’re free to make offers on a new one without being beholden to a home sale contingency.