December 21st, 2019 11:46 AM by Jackie A. Graves
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
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 sold for less than the
total amount of debt that’s against the property. 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.
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
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