Selling a House With a Mortgage? Here’s Everything You Need to Know

It’s not uncommon to sell a house when you still owe money on your mortgage. We’ll walk you through what you need to know about home equity and paying off that loan.

If you’re looking at selling your home, you may be wondering whether the money you owe on your mortgage makes for an instant dealbreaker. About 60 percent of U.S. homeowners who live in their homes have a mortgage, so you’re not alone. Our guide below provides answers to the top questions on the minds of home sellers with a mortgage:

Can you sell a house with a mortgage?

Here’s the simple answer: Yes, you can sell a house with a mortgage. In fact, it’s fairly common to do so. According to the National Association of Realtors®, homeowners typically sell their home after 10 years, shorter than the typical 30-year mortgage. Of course, the process of selling your home with a mortgage depends upon your financial situation. If you want to sell, go ahead and ask your lender to give you a payoff quote so you can consider your options. Be sure to keep in mind that, regardless of outcome, your mortgage must be paid off when you sell your home.

What happens when you sell a house before the mortgage is paid off?

When you sell a home on which you still owe, ideally, your home’s sale price is enough to pay the mortgage balance, plus closing costs, and any home equity loans, lines of credit (HELOCs) or reverse mortgages you’ve taken against the home. You also will want to consider possible prepayment penalties if you’ve owned your home for a short time. Once the sale is closed and everything is settled, your home equity—the portion of the sale price that remains—is yours to keep, or apply to the purchase of a new home.

If your financial situation allows, you may choose to buy your new house before your old one sells. In this case, you might consider a short-term bridge loan, using existing equity to fund your down payment. But be wary—bridge loans can be costly as rates rise, especially if your home doesn’t sell.

If your home is “underwater,” the unfortunate situation of holding less market value than is owed on your mortgage, you will either have to pay the difference from your own pocket or work with your lender on available options if you still want to sell.

What happens to a mortgage when you sell a house?

In a traditional sale, the funds the buyer brings to the transaction (based on your home’s market value) will cover what you owe on your mortgage plus closing costs, especially if you’ve been paying into the mortgage for several years. So what happens to the mortgage in this case? In plain terms, once the mortgage is paid off, it’s paid off.

Can I keep my mortgage rate if I sell my house?

In some cases, if you’re buying a new home and the new lender approves, you can transfer, or “port,” the same terms of the old mortgage to the new one. Doing this can be a way to help home sellers save money and avoid early repayment penalties. Keep in mind that you’ll need to reapply and keep your credit and finances in good shape to successfully port a mortgage. And if you’re attempting to purchase a more expensive home, as 41 percent of home sellers did in 2022, you can use your existing equity or any savings to sweeten the deal.

What happens to your mortgage and equity if the house loses value?

A sudden or extreme drop in home value can heavily impact the financial success of your home investment. When a home’s market value falls below the amount owed on the home, the owner can find themselves in negative equity. While you might want to try to sell your home to get out of this situation, staying put and continuing to pay your mortgage until your financial outlook improves often carries the least risk. If you ever have concerns about being able to make a mortgage payment, contact your lender as soon as possible and work with them to consider your options. A lender can suggest a repayment plan, loan modification, or forbearance to help you work through financial hardships.

What if I have to sell a house for a loss, how does that work?

If you still want to sell your underwater home (for a loss), you’ll need to either pay off the shortfall in the mortgage and fees yourself, or work with the lender to coordinate what is called a “short sale.” In an approved short sale, your lender allows you to sell your home for less than you owe based on proven financial hardship. Be warned—short sales must be publicly disclosed on listings, and can notoriously take months or years to close. How much of the mortgage you will have to pay will depend on your lender’s assessment of your finances.

Alternatively, if you can afford to pay your mortgage shortfall and the associated closing costs, selling your underwater home for a loss to a willing buyer is an option. Sundae can help you find multiple cash offers to compare so you can choose the best one.

What are the different types of equity?

Knowing the different types of equity you can have in your home will be helpful in determining whether you can afford to buy before you sell.

Home investment equity

Money invested directly in your home through a down payment, renovations, or monthly or one-off principal mortgage payments.

Earned equity

Value received from the appreciation of your home over time, based on market and buyer behavior.