Selling a house with a mortgage? What you need to know

The most common home loan is a 30-year fixed-rate mortgage, but the average homeowner only stays in their house for roughly eight years. So what happens when homeowners still have an outstanding mortgage balance and want to move?

Selling a house with a mortgage is a common practice in real estate. The lender is paid off at closing either from proceeds from the home sale (if the house sells for more than is owed on it), from the seller’s pocket (if the house sells for less than is owed), or a combination of both.

Can you sell a house with a mortgage?

Yes. As long as you’re in good standing with your lender, selling a house with a mortgage is standard practice. A high-level overview of the process looks something like this:

• Once your home sale closes, you will use the proceeds from the sale to pay off your lender.
• If the proceeds from your home sale aren’t enough to pay off your balance, you will be responsible for the remainder at closing.
• Sellers in this position may also request a short sale (in this transaction, the home is sold for less than is owed and all proceeds go to the lender) or postpone selling until they can sell for more money.
• After your mortgage balance and closing costs are paid, any remaining funds will be disbursed to you.

Can I sell a house with a reverse mortgage?

Yes. If you relinquished some of your home equity to a lender in exchange for a loan (a reverse mortgage), you can still sell your house. However, you will need to pay the entire loan balance when your home sells, just like with a traditional mortgage. 

Learn more about selling a house with a reverse mortgage.

How to sell a house with a mortgage

Of course, there’s more nuance to selling a house with a mortgage that you haven’t paid off yet. The steps below breakdown the process in detail:

1. Determine your remaining loan balance

Your loan balance will give you an estimate of how much of the proceeds from your home sale will need to go towards paying off your mortgage and how much could end up in your pocket. This can help you set your listing price. If possible, you’ll want an asking price high enough to cover the balance.

You can determine your balance by contacting your lender and requesting the payoff amount for the loan — this number is how much you will have to pay to satisfy the terms of your mortgage. It’s different from your current balance as it includes the interest you are also responsible for paying, as well as any early payment penalties.

Use Orchard’s Home Sale Calculator to find out how much you could make from the sale of your home.

2. Set your timeline

Selling a home has a lot of steps. It can be helpful to map out your move to make things simpler and avoid seller’s remorse. Here’s what to consider:

• Reasons for moving: If you’re moving out of necessity, you may have to move with a deadline (the start date of a new job, for example). If you have more flexibility (maybe you want a house with a view or you’re upsizing), try and take advantage of seasonal trends in real estate.
• Market conditions: The real estate market has been red hot for the past few years, but now there are talks of a market correction and fears that prices will drop. Pay attention to national and local trends to optimize your time on the market. 
• Your next home: Do you already have living accommodations for after you sell your house? You may have a harder time finding your next house than selling your current one. Factor in your home search to your selling timeline to make sure you don’t get stuck without a place to stay, or on the hook for two mortgages at once.

3. Prepare your house for sale

Once you’ve set your timeline, kick it off by getting your house ready for sale. This process can take as much as three months to complete. Follow these basic tips to get the process started:

• Deep clean: Want to give your home that new house smell for potential buyers? Start with a deep clean. Not only will this help your home shine in showings, but starting with a deep clean can also ensure that you have the best listing photos.
• Declutter and depersonalize: This process will neutralize your space and allow potential buyers to see the house as their future home, rather than your current one. Clear away family photos, knickknacks, and other décor.
• Paint walls neutral colors: Even though bold colors attract some buyers, they don’t attract all buyers. Neutral tones act as an invitation for potential buyers to see their preferred wall colors, while soothing them. 
• Consider staging your home: It can sometimes be difficult for buyers to imagine the flow of a home without furniture in it — how functional is the kitchen bar? Could you fit four stools there?

If all of your furniture is moved out by the time your home is on the market, consider staging the home to help buyers envision what life in your home might look like.

Read about preparing your house for sale in more detail.

4. Sell your house and enter closing

Work with an experienced local real estate agent to market your home and come up with a strategy for reviewing offers. Once the right offer comes in, accept and prepare to close.

When you sign the purchase contract, your closing manager will open an escrow account, which is essentially a holding tank for the documents and money you’ll exchange in a house sale. It can take almost two months to close on your home sale, so be patient in this final chapter of your journey.

Check out this breakdown of everything that happens in closing. 

5. Review closing costs

Once the deal is in escrow, you’ll receive a settlement or closing statement. This document breaks down your home sale transaction into an itemized list of fees and credits. Here you’ll see the seller’s closing costs, which include:

• Mortgage payoff
• Prorated property taxes
• Prorated HOA fees and transfer fees (if applicable)
• Title and associated fees
• Attorney’s fees
• Realtors’ commission
• Real estate transfer tax

Review the list with your agent to ensure everything is in working order. Once you confirm, prepare for closing day.

6. Pay off remaining mortgage (and pocket the rest)

On your closing date, the buyer will send their payment to the escrow account. Your title company will make the final mortgage payment directly to your lender. Now, there are no liens on the home and ownership can be transferred over to your buyer.

Any remaining funds will be disbursed to your account — congratulations on your home sale!

Can I get a mortgage on a new house if I haven’t sold my old one yet?

If you’re buying and selling a house with a mortgage at once, things can get tricky. In a perfect world, you would sell your old home and buy your new one on the same closing date. Your real estate agent can try to negotiate this scenario for you, but more often than not, one part of the transaction needs to happen before the other. Here’s how this might play out:

If you buy your new home first

• You might have some trouble getting a new mortgage with ideal terms before you sell the old house because lenders may factor in your existing mortgage debt.
• You’ll have to pay for two mortgages at the same time until you can sell your old house.
• Your new house hunting budget may be limited if your down payment is locked away in your current home.

Frequently asked questions (FAQ)

Here are some of the most common questions that come up for homeowners who are selling a house with a mortgage:

Q: How soon after buying my home can I sell it?

Answer: In most cases, you may sell your home whenever you’d like. However, if you’re selling a house with a mortgage, you’ll 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 (some lenders charge this fee if you end your mortgage early). 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: When do I tell my mortgage lender that I’m selling my house?

Answer: You don’t need to tell your lender about your home sale until you’ve accepted an offer. However, it may be helpful to let them know earlier so they can give you an accurate mortgage payoff quote. This number will help you and your agent figure out how much the sale price needs to be so that you can cover the mortgage payment.

Beyond this, your lender’s involvement in the process is pretty limited. They may need some information about your buyer and their lender, but as long as your buyer is financially qualified, there should be no issues.

Q: How can I buy and sell a house with a mortgage at the same time?

Answer: You could make an offer on a new home that is contingent on selling your old home. However, this can make your offer less competitive since sellers prefer bids that won’t fall through, even if it means accepting a lower offer. 

Or, you can work with a service like Orchard. We’ll help you Move First by guaranteeing the sale of your current home and allowing you to unlock the equity to put towards your new one. Once you’ve moved into your new home, we’ll handle selling the old one. This can save you over $5,000 in moving expenses alone. Get started with a free home valuation.