How Do Mortgages Work When Selling

Work Out Your Finances

If youre asking how to sell and buy a house at the same time, the next step is to get your head around your finances. This means youll need to work out how much can you afford to spend on your next house and how much equity you have in your current home.

Then there is the chain to consider. When you exchange contracts on the property you want to buy, youll need to pay a deposit. You should exchange on the same day as your buyer exchanges, and therefore youre able to use the deposit they pay you to pay your deposit on the property youre buying.

However, if your new house is more expensive than your current house its likely that the deposit required will be more than the deposit you receive. If this is the case, it may be that your solicitor can agree with your sellers solicitor that the smaller deposit will be enough. But if this isnt possible, youll need to find the extra cash. Its worth checking to see if youre financially able to do this before you start the process.

Once Your Home Has Sold

When your home settles, the ownership will be transferred into the name/s of the new owner/s. At this point, your lender will receive the money from the buyer to pay off the mortgage, and register the discharge with your state/territorys Land Titles Office.

There are usually some fees involved in discharging your mortgage – such as a discharge fee or break costs – that can typically be deducted from the proceeds of the sale.

This means you wont need to outlay any of the costs yourself, but will receive less from the sale of your home. These costs are in addition to the normal costs associated with selling your home such as legal fees, real estate agency commission, and more.

How Does Selling A House With A Mortgage Work

The first step is to fill in a Discharge of Mortgage form which can be found on your bank or lender’s website. It will ask for details such as:

• home loan account numbers

Be sure to read all the information and understand it before lodging as it gives the bank authority to start the process.Remember it can take between 14 and 21 days for a mortgage to be discharged, so it is important to factor this into your timeline. You will still be responsible for making mortgage repayments right up until the sale is finalised.Obtaining a settlement or closing statement is also a good tip, as it outlines the closing costs and can give you an idea of any profit.Your bank will arrange with your solicitor or conveyancer for the outstanding amount on your mortgage to be paid at settlement this will be taken out of the proceeds of your sale price.Your lender will also register the discharge of the mortgage with the Land Titles Office in your State or Territory. This means that property is free of any ‘encumbrance’, which is a legal term referring to restrictions that may prevent a sale. Discharge fees can range from $0 to $550.

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How Does A Mortgage Work A Simplified Guide For First

Chelsea Levinson, JD, is an award-winning content creator and multimedia storyteller with more than a decade of experience. She has created content for some of the worlds most recognizable brands and media companies, including Bank of America, Vox, Comcast, AOL, State Farm Insurance, PBS, Delta Air Lines, Huffington Post, H& R Block and more. She has expertise in mortgage, real estate, personal finance, law and policy.

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

The time has come: Youre ready to dip your toes into homeownership, and youre vaguely aware you might need a mortgage to get the job done. The only problem? You dont know the first thing about mortgages how they work, how much they cost, or how to get one.

Youre not alone the mortgage stress is real. In fact, a recent TD Bank survey of would-be first-time buyers found that 75% are overwhelmed by the homebuying process.

The inertia ends here! We spoke to Richie Helali, Mortgage Sales Leader at HomeLight Home Loans, to walk us through the basics on getting a mortgage. Heres what buyers need to know.

Home Buying While Selling

Its fairly common to choose to buy a property first, but make the sale subject to selling your existing property. This means you are making an offer, with the condition that you will only go through with the purchase if your current property is sold with a set time frame.

For some people, this is the ideal solution as it means you dont have to pay for two mortgages at once. However its worth noting that having this condition may make your offer less appealing to the seller than others, and it can add some stress around selling your property in time.

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Determine The Right Time To Sell

The right time to sell is a complicated question because everyones situation is different. Here are several factors to consider:

• Why are you moving? If you have to relocate for career reasons, you might want to move faster than if youre downsizing or looking to take advantage of a strong housing market.
• What kind of market is your home entering? Theres a big difference between a buyers vs. sellers market. If competition in your area is high and there are fewer homes available for buyers, you can set your home price higher than if it was the other way around. Its helpful to have your real estate agent do a comparative market analysis.
• Are you confident you can find another house? If youre looking for another house, you may find that its tougher in many markets than it has been in the past. The same conditions that make it a good time for you to sell can make it a difficult time to buy. Theres something to be said for not wanting to ever make two mortgage payments at once, but you also may not want to sell only to move into an apartment and pay for storage.

Prepare Your Home For Sale

It goes without saying that youll want to sell your house for the highest price possible. So its vital that you get it sale-ready to try to achieve the best price.

This might include:

• Giving your house a fresh lick of neutral paint to make rooms seem lighter and bigger
• Maximising your kerb appeal. Our survey of more than 2,000 UK adults conducted by YouGov, revealed the most important features for kerb appeal were well-maintained windows and a roof that appeared in good condition.

For more tips read our guide Tips to make your home more valuable and sell faster

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Other Types Of Liens May Be On Your Home

Other types of liens may be on your property besides a mortgage lien.

• A mechanics lien is placed against a property when the owner fails to pay for repairs or improvements made to the property.
• An IRS tax lien is placed against a property when the owner owes back taxes to the government.
• A homeowners association lien is placed against a property when the owner fails to pay their HOA dues.

Selling With A Mortgage Faqs

Do I need to tell my mortgage company if I am selling my house?

Definitely. Youll need to let them know and youll also want their help to talk through the different options, unless youre using a separate advisor. Even so, they should be one of your first ports of call.

How do you sell a house while still paying a mortgage?

Can you sell a house if you haven’t paid off the mortgage?

Mortgage advice without the jargon

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Estimate Your Net Proceeds

Now that youve collected a home value estimate and your mortgage payoff amount, use this simple home sale proceeds formula to estimate how much youll walk away with:

HomeLight also offers a handy Net Proceeds Calculator to help you better estimate the cost of selling your home and the net proceeds you could earn from the sale. In addition, your agent may prepare whats called a net sheet for you, which can help you account for any local fees and costs specific to your area.

You wont know the exact breakdown of credits and fees for the sale until you receive your estimated settlement statement at closing, but a ballpark calculation upfront can help you get a clearer vision of whether now is the right time to sell from a financial perspective.

Many sellers underestimate what it costs to sell a home which totals an average $31,000 not including the mortgage payoff, according to an analysis by HomeLight.

If the estimated margin between your home value and selling costs is slimmer than you realized, you can determine whether to move forward or wait a few years to build up more equity before selling.

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Get A Bridge Loan From A Financial Institution

If you have no other choice, it may be possible to borrow money from a bank or other lender to bridge the period between when you close on your new house and when you get your money from the sale of your old one. This idea is that you take out a short-term loan on your existing house, using it toward the down payment and closing costs on your new house, and repaying it when your first house sells.

Bridge loans can, however, be far more expensive than regular mortgage or home equity loans , and they’re not easy to qualify for. You’ll need plenty of equity in your current home and enough income to pay both mortgage payments indefinitely. The requirements all but negate the benefits of the loan.

For an all-in-one guide to selling your home for the best price in any market, get Selling Your House: Nolo’s Essential Guide, by Ilona Bray.

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Advantages Of Buying Your New Home First

• There will be no need for you to live âbetween homesâ.
• You could have an easier time getting your home ready to sell after moving out.
• You could make improvements and renovations to your new home before moving in.

Contact your mortgage specialist and/or a real estate professional to discuss your options for managing the logistical challenges and complexities of selling one home while purchasing another.

The strategies, advice and technical content in this publication are provided for the general guidance only and benefit of our clients. This publication is not intended to provide specific mortgage, financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. Readers should consult their own professional advisor when planning to implement a strategy to ensure that individual circumstances have been considered properly and it is based on the latest available information.

Personal lending products and residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria. Some conditions apply.

Is It Ever A Bad Idea To Sell Your Home Before Its Paid Off

The timing of when to sell a home is really a personal decision and dependent on your circumstances and financial goals. However, keep in mind that if the value of your home wont cover your outstanding mortgage balance and selling expenses, youll need to bring separate funds to the sale to cover the difference.

Another thing to keep in mind: if you sell the home before owning it for a minimum of two years, youll likely have to pay capital gains tax if you make money from the sale.

• If youre selling less than a year after buying, youll have to pay a short-term capital gains tax on your gain from the sale, which is taxed as ordinary income according to your tax bracket.
• If youre selling more than a year after buying, but less than two years, your gain will be taxed at the lower long-term rate either 0%, 15%, or 20%, based on your capital gains tax bracket.

If youve owned and lived in the home for two of the past five years and havent excluded gain from the sale of a different main residence in the past two years the IRS allows you to exclude up to $250,000 of gain if single or married and filing separately, or up to $500,000 if married and filing jointly. We always recommend reaching out to a tax advisor to go over the details of your individual transaction.

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Q: How Soon After Buying My Home Can I Sell It

Answer: In most cases, you may sell your home whenever youâd like. However, if youâre selling a house with a mortgage, youâll need to wait until you have enough equity to profit or break even on the sale.

The money you make from the sale would ideally cover your mortgage balance, closing costs, and in rare cases, prepayment penalties . If you sell your home less than two years later and make a profit, you may also have to pay capital gains tax, so make sure to factor that in as well.

Q: Can I Use The Proceeds Of My Sale For The Deposit On The Home Im Buying

Yes. You should exchange on the same day as your buyer exchanges, and therefore youll be able to use the deposit they pay you to pay your deposit on the property youre buying.

However, if your new house is more expensive than your current house its likely that the deposit required will be more than the deposit you receive. If this is the case, it may be that your solicitor can agree with your sellers solicitor that the smaller deposit will be enough. But if this isnt possible, youll need to find the extra cash. Its worth checking to see if youre financially able to do this before you start the process.

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Arranging A Discharge Of Mortgage

When you sell your home, youâll usually have to arrange for the mortgage to be discharged before settlement takes place. This involves completing and signing a formal discharge of mortgage form and providing it to your lender. The discharge process often takes up to two or three weeks, so itâs important that you arrange for it to happen as early as possible in the settlement period.

Once youâve lodged your discharge of mortgage application, the lender will speak with your solicitor or conveyancer and arrange to be present at settlement. At that time, theyâll arrange to receive any money theyâre owed from the proceeds of sale. The lender will then generally register the discharge of mortgage at the Land Titles office in your State or Territory to show they no longer hold an interest in the property.

There are often fees involved in discharging a mortgage, including a discharge fee and, if you have a fixed rate loan, potentially break costs. Some lenders also charge a fee for paying off your home loan very early, say within the first three to five years. Theyâll usually add these fees to the amount they take from your sale.

The lender isnât the only one who will take money from the proceeds of your sale. Youâll generally also have to pay any outstanding rates and utility fees, as well as fees to your solicitor or conveyancer and real estate agent. Any balance left over becomes yours.

Drawbacks For Sellers Holding A Mortgage

Even though there are many advantages, sellers must understand the negatives of holding a mortgage note.

The biggest concern most sellers have is buyers not making loan payments and not maintaining the property. There might be a hidden reason the buyer isnt seeking traditional financing.

Youll have to enter legal proceedings to foreclose on the property. If the buyer cannot pay what they owe, you become the owner again.

If this happens a few years into the loan, you may have thousands of dollars of profit. But the amount of damage to the property could be significant due to years of neglect too.

If a buyer walks away early on, there may be fewer problems. But less money has been paid to cover legal costs and make repairs over this time as well.

This is why its essential to get a down payment large enough to cover some major expenses.

Another problem to consider when you provide owner financing is tying up a large sum of money that could be used or invested in other ways for an extended period.

Lending practices have also affected some sellers ability to offer financing on real estate in the last decade.

The financial crisis of 2007-2008 led to the passage of the Dodd-Frank Act of 2010. This legislation exists to help protect consumers from predatory lending practices.

It would likely not impact you holding a note for one property, but if you plan to offer seller financing on your home or land, discuss this with your attorney and real estate agent.

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Who Owns The House With A Reverse Mortgage

A reverse mortgage loan does not involve transferring ownership of your home to a lender. The title to the home still belongs to you. Interest and fees are added to the loan balance each month, and that amount is then included in your loan balance. Repayment of the loan is possible by selling the house.

If you move out or the last surviving borrower/eligible non-borrowing spouse dies, you must repay your HECM loan, but never beyond the value of the house.