If you still owe money on your mortgage and want to sell your home, you’re in good company. The vast majority of home sellers have an outstanding mortgage balance at the time of sale. Selling a house with a mortgage is a completely normal and straightforward process, as long as the sale price exceeds your remaining loan balance and closing costs. When it doesn’t, the situation requires more careful navigation. This guide covers every scenario so you know exactly what to expect.
The Standard Scenario: You Have Equity
If your home’s market value exceeds your remaining mortgage balance, you have equity, and selling is straightforward. At closing, the title company uses a portion of the buyer’s purchase funds to pay off your existing mortgage in full. The lender releases the lien on the property, and the remaining funds after closing costs are your net proceeds.
How the Payoff Works
Before closing, your mortgage servicer provides a payoff statement that shows the exact amount needed to satisfy the loan. This amount includes the remaining principal balance, any accrued interest through the closing date, and any applicable fees. The payoff amount is slightly higher than your current balance because interest accrues daily between your last payment and the closing date.
The title company handles the payoff disbursement directly. You don’t need to pay off the mortgage separately or bring any funds to closing. Everything is handled through the closing process, and you receive your net proceeds after all costs are deducted.
Calculating Your Equity
To estimate your equity, take your home’s current market value and subtract the remaining mortgage balance and estimated closing costs. For example, if your home is worth $400,000, you owe $220,000 on the mortgage, and closing costs total $32,000, your estimated equity is $148,000.
A comparative market analysis from a local real estate agent gives you the most accurate estimate of market value. Online home value estimates can be off by 5% to 10% or more, which translates to significant dollar amounts on a home’s value. Use our free agent matching service to connect with a local expert who can assess your home’s true market value.
What If You’re Underwater?
Being underwater, also called being upside down, means you owe more on your mortgage than the home is currently worth. While this was extremely common after the 2008 financial crisis, it’s less prevalent today due to significant home price appreciation over the past decade. However, it can still occur in areas with declining values, for borrowers who purchased recently with minimal down payments, or for those who took out home equity loans that increased their total debt.
Option 1: Wait for Equity to Build
If your situation isn’t urgent, the simplest solution is to continue making mortgage payments and wait for the combination of principal paydown and market appreciation to bring you above water. With a typical amortization schedule, each year of payments reduces your balance by a meaningful amount, and even modest annual appreciation adds equity on top of that.
Option 2: Bring Cash to Closing
If you need to sell while underwater, you can cover the shortfall by bringing cash to the closing table. For example, if your payoff is $310,000, closing costs are $25,000, and you sell for $320,000, you’d need to bring approximately $15,000 to closing to cover the gap. This is painful but allows you to sell, clear the debt, and move forward.
Option 3: Short Sale
A short sale occurs when the lender agrees to accept less than the full mortgage balance as payment in full. Short sales require lender approval and can take three to six months or longer to process. They also negatively impact your credit, though less severely than a foreclosure. Short sales are typically a last resort for sellers who can’t bring cash to closing and can demonstrate financial hardship to the lender.
Selling With Multiple Mortgages
If you have a second mortgage, home equity loan, or HELOC in addition to your primary mortgage, all liens must be satisfied at closing. The title company pays off each lien in order of priority, with the first mortgage being paid first. If the sale proceeds are insufficient to pay off all liens, you’ll need to negotiate with junior lien holders or bring additional funds to closing.
Prepayment Penalties
Some older or non-conventional mortgages include prepayment penalties that charge a fee if you pay off the loan early. Review your original mortgage documents or contact your servicer to determine if your loan has a prepayment penalty and what the cost would be. Most conventional loans originated in recent years do not include prepayment penalties, but some adjustable-rate mortgages and certain non-conforming loan products do.
Timing Your Sale and Your Next Purchase
If you’re selling one home and buying another, coordinating the two transactions requires careful timing. You have several options for managing the overlap.
Selling first and renting temporarily gives you the most negotiating power as a buyer because you can make non-contingent offers on your next home. Buying first and then selling gives you a smoother transition but requires carrying two mortgages temporarily. A contingent sale, where your purchase is contingent on selling your current home, keeps everything connected but can weaken your buying position. Bridge loans can provide temporary financing to cover the gap between buying and selling.
Our guide on buying a house while selling your current one covers every strategy in detail.
Tax Implications of Selling
Most homeowners selling a primary residence qualify for the capital gains tax exclusion, which allows you to exclude up to $250,000 in profit from federal taxes if you’re single, or up to $500,000 if married filing jointly. To qualify, you must have owned and lived in the home as your primary residence for at least two of the past five years.
If your profit exceeds these thresholds, the excess is subject to capital gains tax. Consult a tax professional for advice specific to your situation, especially if you’ve rented out the property, used it partially for business, or owned it for less than two years.
Steps to Get Started
Start by requesting a current payoff statement from your mortgage servicer. Get a comparative market analysis from a local real estate agent to determine your home’s current value. Calculate your estimated equity by subtracting the payoff amount and estimated closing costs from the expected sale price. If you have equity, proceed with the selling process using our complete selling guide. If you’re close to break-even or underwater, discuss your options with your agent and potentially a financial advisor before deciding how to proceed.
Having a mortgage on the home you’re selling is normal and shouldn’t cause anxiety. The process is handled cleanly through the title company at closing, and the only real concern is ensuring you have sufficient equity or resources to cover all costs. Connect with a vetted local agent through our free matching service to get an accurate picture of your home’s value and your selling options.