A mortgage loan is the biggest debt you’ll probably ever have.
And for many people, it’s a debt that’s difficult to handle. In early 2021, more than two million American families were at least three months behind on their mortgage payments. That’s the highest number since the Great Recession, thanks to the Covid pandemic.
Even if you’re able to stay current, it can still be challenging to make your home payments on time each month. There’s no way most people could handle two mortgages, even for a short period of time.
So what happens when you want to sell your house with a mortgage – in order to buy another one?
Don’t panic. Millions of people do it every year without risking financial disaster – and you can too.
The Catch-22 of Buying a New Home
It might seem virtually impossible to buy a new house, when you’re already saddled with a big mortgage on the home you want to sell.
- It’s quite likely you don’t have the available cash needed to pay off the loan on your first house, before buying a new one and taking on a new mortgage. You’ll probably need the proceeds from the first sale to pay off the mortgage – and probably to make a down payment on the second house, too.
- If you buy the second house while you still own your first one, it can be extremely difficult (to put it mildly) to carry both mortgages. The bank might not even give you another big loan if you still owe money on the first one.
- If you sell your current house and pay off your mortgage before shopping for a new home, you’ll be left without somewhere to live for a while.
Those are all real concerns, of course, since there’s big money involved. No mortgage lender is simply going to say “Go ahead and buy the new house. We’ll trust you to start paying your new loan and pay off your old one after the first house is sold.”
On the other hand, the health of the U.S. housing market depends on the constant purchase and sale of homes. And since nearly half of all homeowners have a mortgage, there have to be workable methods to deal with the issue of selling a house while you still owe money on it.
There are. We’ll examine the options, after looking at exactly what must happen when you sell a house with an existing mortgage.
Bottom Line: It can be quite complicated to buy a new house when you are still carrying a mortgage on your old one. And since most people can’t afford to pay off their old loan until they sell the house that secures it, they’re faced with the distasteful possibilities of carrying two mortgages at the same time, or being “homeless” for a while.
What Happens When You Sell a House with a Mortgage
Let’s briefly put aside questions about “what happens next.” The first things we have to establish are the nuts and bolts of selling a house when there’s an outstanding mortgage to be satisfied.
The Mortgage Balance
The basics of a mortgage are quite simple. A bank or other lender provides money to help someone purchase their home, in return for a promise to pay the loan back over time, with interest. It’s really not much different than a car loan or a student loan.
Why does a mortgage seem so much more intimidating? Three basic reasons: the size of the loan, the length of the repayment period, and the fact that your residence is being used as collateral and essentially being put at risk.
Despite those differences, it’s easy to understand what must happen when you sell a home with an existing mortgage. The remaining balance – the amount you borrowed, minus the amount of the principal you’ve already paid – must be repaid to the lender.
Here’s what that means. Let’s assume you took out a mortgage for $200,000 to purchase your home. If you’ve paid off $50,000 of that amount, you have to pay the remaining $150,000 when you sell the house.
(Our example doesn’t mean you can deduct $50,000 in total mortgage payments from the amount of the original loan. You can only deduct the $50,000 in principal that you’ve repaid. The monthly interest payments you’ve also made don’t factor in when you sell a house.)
There are a few other housekeeping details, of course. You’ll probably still owe a small amount of interest for the month when you pay off your loan, and the balance of any escrow accounts will have to be accounted for. Those details will be taken care of at closing, when the house is sold. That will usually involve a small amount of money changing hands.
Paying off a mortgage, however, normally requires tens of thousands – or hundreds of thousands – of dollars. Where does all of that money come from?
The Mortgage Payoff
In most cases, a house will sell for more than the balance remaining on the mortgage loan. And anyone who’s been making regular payments, month after month, will have built up a substantial amount of equity in their home. Add those two together, and there’s usually plenty of money to pay off the amount due to the bank or mortgage lender.
Let’s go back to our example. If your original loan was for $200,000 and you contributed 20% ($40,000) as a down payment, the home was originally worth $240,000. Even if you only sell the house for that same amount, $240,000, that’s more than enough to pay the $150,000 you still owe on the mortgage.
In fact, it leaves $90,000. Deduct the 6% commissions ($14,400) and 3% closing costs ($7,200) that a seller would usually be responsible for when a house is sold, and that still leaves a $68,400 profit that can be used (if desired) for the down payment on a new house.
And if you sell the house for more than you originally paid – which commonly happens – your profit will be even greater.
So in most cases, you should have no problem settling the mortgage debt after you sell your house. That is, if you simply sell your home and walk away.
Let’s get to the possible complications.
Bottom Line: Selling a house with a mortgage isn’t an issue for many homeowners. Their property’s equity, combined with its likely increase in value, will leave the home seller with more than enough money to pay off the remaining mortgage balance after closing. Problems may only arise when the sale isn’t a straightforward one, or when it’s coupled with a simultaneous new home purchase.
When Your Home is Underwater
Life doesn’t always work the way it’s supposed to.
Normally, when you take out a mortgage, you expect to make your monthly payments regularly and build equity in the home. You also expect the home to gain value over time, adding to your total equity and producing a bigger profit when you sell.
That doesn’t always happen. Some people run into financial difficulties (or make sometimes-questionable financial decisions) and take out additional loans on their home, like second mortgages or home equity loans. Major shifts in the housing market can also cause a home’s value to decline instead of increase over time.
In both cases, that may end up with a home seller owing more on their mortgage than they would receive at the closing. That’s called “being underwater,” and not having enough money to pay off the mortgage on a house can be a devastating issue.
There are only a few possible solutions. One is to find some other source, like family or friends, who can contribute the cash needed to pay the bank. That’s unlikely, of course, since so much money will probably be needed.
The others options are more drastic. The homeowner can just walk away from the house and default on the mortgage, allowing the lender to foreclose. A better choice is to work with the bank on a so-called “short sale,” in which the homeowner is allowed to sell the house for less than they owe on the mortgage.
In both cases the seller loses any equity they may have and their credit rating will suffer, but they’ll probably be able to buy another home more quickly after a short sale.
Most homeowners aren’t underwater when they’re ready to sell, though. Their major concern is being able to purchase another house to live in while they still lots of money to their mortgage lender.
Bottom Line: Homeowners who are underwater, meaning they owe more on their home loan(s) than the house is worth, will find that selling a house with a mortgage is difficult and painful. Unless they can find a white knight (with lots of cash) to ride to their rescue, they’ll probably end up losing all of their equity and damaging their credit history.
Buying a New Home – While Selling a House with a Mortgage
If you want to sell one house with a mortgage and buy another one, you’ve probably gathered that there’s one path that makes the most sense: sell the first home first.
There are numerous advantages to finishing the sales process before beginning a new purchase process.
- In most cases, you’ll easily be able to use sale proceeds and equity to pay off the balance on your existing mortgage.
- In most cases, you’ll be left with a good amount of cash for a down payment on the new house. In some cases, you may even be able to buy the new home for cash.
- In most cases, it will be easier to get a new loan because you won’t be burdened by existing mortgage debt.
- You won’t have to worry about the possibility of carrying two mortgages at once, because the first one will already be paid off.
There can also be several very good reasons not to sell first, of course.
You may have to move to a new area for job or family reasons, and you can’t wait around until your old home is purchased. You may not want to (or be able to) find “somewhere to live” between the time when the first home sells and you buy a new one. Or you may have found your dream home, and don’t want to lose it while your old house is still on the market.
What can you do if you are trying to sell a house with a mortgage – while buying a new one at the same time?
First, don’t panic. Statistics from Zillow show that nearly two-thirds of home sellers are in exactly the same situation, trying to buy a new house while selling their previous one.
Calmed down a little? Good. Here are some options to consider.
Use a Contingency Clause
You’re probably familiar with contingency clauses. They’re used in sales contracts to let a buyer back out of a deal if, for instance, the house fails an inspection or the buyer can’t get a mortgage.
Another possible contingency clause makes the purchase of a house contingent on the buyer selling their own home first. In other words, you won’t close on the new house until you’ve sold your old one. If you’re unable to sell the old house or can’t meet an agreed-upon deadline, you can cancel the deal without penalty.
Many sellers won’t agree to this type of contingency, particularly in a red-hot market where plenty of other potential buyers are looking for homes. It’s definitely worth trying, though.
Use a Home Equity or Bridge Loan
These are more expensive options, but could be worth considering if you’re confident you’ll be able to sell your old home shortly after closing on the new one.
A home equity loan (or HELOC) allows you to borrow against the value that’s already built up in your old home, in order to make the down payment (and pay the closing costs) for a new one. A bridge loan (which “bridges the gap”) is simply an additional short-term loan that can be used for the same purpose. When the first house is sold, the HELOC or bridge loan must be paid off from the proceeds.
Interest rates for both of these types of loans will usually be higher than the rates banks traditionally charge for a new mortgage. A home equity loan is easier to get if you have enough equity built up in the old house.
Just be careful: if you have difficulty selling the old house, you could be stuck making two mortgage payments (one for each house) plus an expensive additional loan payment for a prolonged period of time.
Simply Carry Two Mortgages
Easier said than done, of course, but this is the simplest answer if you have the financial resources to afford the down payment on a new house. The same risks apply as with HELOCs and bridge loans; if you can’t sell the old house quickly, you could end up carrying two mortgages for quite a while.
Rent Out Your First House
One of the major reasons people are afraid to look for a new house while trying to sell their old one is obvious; they could end up having to pay two mortgages. Finding a short term tenant (or even renting the home via a service like Airbnb) can bring in money to help pay the old mortgage until the house can be sold.
Caution: not all lenders allow you to do this. Be sure to check with your mortgage holder first. Also be aware that becoming a landlord (even temporarily) can increase the stress levels associated with home selling and buying, and it can cause added hassles when you’re trying to show a house where a tenant is living.
Fallback Solution: Sell to a Home Investor
There’s no harm in crossing your fingers and trying to sell your home while searching for a new one. But what if you find the perfect home – and can’t afford to buy it because your old house is still on the market?
Home investors and home buying services may be the best alternative. They’ll purchase your home for cash, in a matter of days or weeks. That will let you pay off your existing mortgage in plenty of time to obtain a new one and close on your dream house.
These buyers are likely to offer a lower price for your home. Some may offer substantially less than you’d get on the open market, and some may even charge commissions or high fees for the transaction. (So-called “new-age” buyers like SellYourHome.com often offer the best deals.)
But they’ll purchase your home for cash almost immediately. If your home is already worth substantially more than you’d need in order to buy your new home, this option may be worth considering.
Bottom Line: There are a number of options for those who want to purchase a new home before they’re able to sell their old house with an existing mortgage. Some are more difficult than others; some are riskier. But it’s far from an impossible task to pull off; more than half of those buying a new house are doing it while they still own an old home with a mortgage.
Selling a House with a Mortgage FAQ
Q: Why is it so scary to think about trying to sell one home and buy another at the same time?
A: Primarily because there’s so much money at stake. Mortgages average well into six figures, and the thought of being inadvertently stuck paying two of them at once can understandably be frightening. For many people, however, the chance to upgrade or move to a more desirable house makes it worth trying to buy and sell homes simultaneously.
Q: What’s the best way to sell your house if there’s a mortgage on it?
A: There’s no simple answer; it really depends on your personal and financial situation. The simplest approach is to sell the home, pay off the mortgage from the proceeds and accumulated equity, and then shop for a new house. However, that’s not possible if (for example) you have to move in a hurry, or don’t want to (or can’t) find “interim housing” when you’re shopping for a new home. Every year, millions of people look for a new house while still selling their old one, and it can certainly be done. It just requires knowledge, caution and flexibility.
Q: If you’re in good financial shape, is it really a big deal to sell your house with a mortgage?
A: Not usually. It’s more common for homes to be sold with mortgages, than it is for houses that are owned free and clear to change hands.
Q: Can you get burned if you try selling your current house while shopping for a new one?
A: Absolutely, if you’re not careful. You could end up having to pay two mortgages (and possibly even a bridge or home equity loan) if you realize too late that you can’t sell your first house. When dealing with such large amounts of money, there are always risks; understanding the options and choosing the safest one is the best safeguard against getting burned.
Q: How do you sell a house with a mortgage that’s underwater?
A: If you’re fortunate, you find a relative or friend who’s willing to help with the extra cash that will be needed. The other choices, default or a short sale, will usually have financial repercussions – but may be the only options if you absolutely have to sell the home.