What Happens to Your Mortgage Loan When You Sell a House?
Are you thinking about selling your home? If so, you are likely wondering what happens to the unpaid mortgage balance at the time of the sale. This is a commonly asked question. In fact, most people do not know the answer. Let’s take a quick look at what really happens to a mortgage when a home is sold.
The Mysterious Fate of a Mortgage Upon a Home Sale
When a home that has an unpaid mortgage is sold, the funds from the buyer are paid to the mortgage lender. These funds cover the balance of the unpaid mortgage along with transaction costs. If there are additional loans attached to the property, such as a Home Equity Line of Credit (HELOC), those financial obligations will be paid. Furthermore, fees ranging from prorated HOA expenses to escrow fees, taxes, and the agent’s commission, are also paid.
The money leftover, assuming there is any, is the seller’s profit margin. If you end up selling your home for more than the remainder of your unpaid mortgage balance and the transactional costs, you are free to use the proceeds on whatever you desire. Most people decide it is best to use this money as a down payment for their next home. However, there is always a chance the home has declined in value, meaning it might be worth less than the money owed on it.
Insufficient Equity to Pay the Mortgage Upon Sale
If you do not have enough equity in the property to pay off the balance of the unpaid mortgage, you have negative equity, also referred to as being underwater. If you must sell yet lack sufficient equity to cover the unpaid balance of the mortgage, you will have to make up the difference with your own funds or, alternatively, consider a short sale. A short sale for an underwater home occurs when the bank agrees to let the debtor sell the property in question for what is owed on it. The primary downside to a short sale is it hinders one’s ability to purchase another home down the line, as there is no profit to be used for a downpayment on the next home. Furthermore, a short sale will negatively affect the seller’s credit score.
What About Selling a Home With a Mortgage to Buy Another Home?
The majority of property sellers try to purchase and sell a home at the same time. The fate of the mortgage hinges on which of the two transactions closes first. If you sell your home before buying the next home, there is no need to worry about covering the cost of two mortgages at the same time. The equity is freed up upon the home sale for use as a down payment on the next home, making the entire process quite easy.
If you buy a home prior to selling your current home with an unpaid mortgage, things get a little more complicated. The main challenge is figuring out a way to fund the down payment on the new home, as the majority of your equity is likely tied up in the initial home. Potential solutions include a HELOC line of credit secured through the equity in the current home to make it easier to fund the down payment on the new home.
Another solution is a bridge loan or temporary loan to make it easier to cover the new property’s down payment while waiting for equity in the former home to be freed up. Finally, there is the option of a contingent sale in which you submit offers for a new property based on the contingency that the closing will not occur until the home currently owned sells.
Request a Cash Offer for Your House Today
If you are thinking about selling your home, our team is here to help. We buy houses for cash, in any condition. We can close a sale within a couple of weeks and you will have the cash you need to pay off the mortgage on your existing home. Reach out to us today, so we can provide you with a cash offer for your home. You can contact We Buy Houses Oklahoma City by dialing (405) 757-2507 or by filling out our convenient online contact form.