What Happens to Your Mortgage When You Sell Your House and Buy Another

Mortgages and Home Sales Basics

A mortgage is a loan to purchase a home. Many people rely on mortgages to purchase homes because of the high price of real estate. Lenders review an applicant’s creditworthiness and payment history to determine whether or not to issue a loan. The lender typically provides the borrower with a maximum loan amount based on income and credit score.

Once a loan is approved, the lender transfers the payment for the home to the seller. The lender then charges the buyer each month. The monthly payment includes the premium, taxes, escrow, and interest. Most lenders structure their repayments with the borrower paying more interest up front and more towards the premium at the end of the loan.

The mortgage lender may also require private mortgage insurance (PMI), an insurance policy on the mortgage itself. The money protects the lender if the borrower defaults on the monthly payments.

Some people take out a home equity loan, which is when they borrow against how much the home is worth. If you have a home equity loan, you must sell the house for a high enough price to pay off the loan. 

The Role of the Mortgage Lender

Because the lender is financing the home purchase, they have a say in the purchase price and property condition. Lenders set a maximum loan amount per borrower based on income and the local real estate market. This is excellent for first time home buyers because they make an actual financial investment, and lenders ensure it’s a solid investment. 

However, they also set a maximum loan amount equal to a certain percentage of the home’s value. A lender won’t finance a home for more than its value, so a buyer submitting an offer over the loan amount must pay more out of pocket.

Lenders may also require an appraisal and inspection to protect their investment. Mortgage companies also require a title company, which ensures the property has no unpaid liens or title issues that could impact the sale.

Typical Sales Transactions

Here is what sellers/buyers can expect during a traditional sale:

1. A buyer submits a purchase offer on a home, which includes the price, contract terms, and contingencies.
2. If the seller accepts the offer, the buyer’s mortgage company is notified. They begin underwriting, which may include an appraisal and inspection.
3. After reviewing the sale, the lender may set a date when both parties meet at the closing table to sign documents.
4. The seller and buyer meet at closing to sign paperwork and transfer the property. The buyer is responsible for closing costs, down payment, escrow fees, and other transaction-related expenses. The seller also pays fees, including real estate agent commissions, title insurance, and transfer taxes.
5. The escrow account diverts the buyer’s funds, including paying off the home’s mortgage balance or leftover property taxes. 
6. If there is any extra money left in the escrow account, such as through earned equity, it is diverted to the seller. Whether or not the seller has existing equity will depend on how much profit was gained from the sale. A seller with negative equity must pay the difference to cover the full payoff. It’s crucial to consider the entire home equity before selling.

You Will Have to Pay Off Your Remaining Loan Balance

Lenders require borrowers to pay off their outstanding mortgage balance when selling. The proceeds from a home sale must go directly to the mortgage loan balance. If a home sells for more than the payoff amount, it is called home equity, which goes to the seller. The more home investment equity a seller has, the more they have to apply to a new home.

Obtaining a Payoff Statement

Before selling, it’s best to obtain a current payoff statement. Knowing exactly how much you owe can help set a sale price. It also provides valuable negotiation information, so you know how much room you have to drop the price. Selling a home for less than the remaining mortgage usually requires the seller to pay the difference out-of-pocket.

Prepayment Penalties

It’s important to note that some mortgage companies charge prepayment penalty fees for paying off a loan before the 15- or 30-year agreement. Lenders make their money through accrued interest, dependent upon monthly payments over an extended period. 

When you sell your house before the loan is complete, the lender loses out on interest payments. Your payoff statement should include any prepayment penalties to factor these and other real estate costs into your selling price.

Financing Your New Home Purchase

Many sellers may seek a new loan after selling to finance a new house. Depending on the selling and buying timeline, this could lead to paying two mortgages in the interim.

Mortgage Options

Buyers have a few options available when financing a new home, including the following:

• Conventional Loans: A conventional loan offers a lower interest rate and flexible loan terms.
• FHA Loans: FHA loans may be an option for borrowers with less-than-perfect credit.
• VA Loans: VA loans are available to qualified veterans and offer loans with no down payment options.

Prequalification and Pre-approval

Borrowers must undergo prequalification and preapproval before making an offer on a new home, even if they already have an existing mortgage. A prequalification tells buyers how much home they can afford, whereas a preapproval means the buyer is likely to be approved for a mortgage loan.

Loan Application and Underwriting

The sales process requires the buyer’s application to undergo underwriting when the mortgage company reviews the borrower’s application to determine eligibility. Once the mortgage company approves the loan, they clear the deal for closing. You may also have to submit proof that you can pay both your mortgage and a second mortgage in the transition.

Timing and Coordination

Selling a house with a mortgage and then using financing to purchase a new home can be overwhelming and often requires careful timing. Some buyers may attempt to time each sale to avoid paying two mortgages. Additionally, some buyers may rely on the funds earned from selling to cover a new home purchase’s down payment and closing costs.

Simultaneous Closing

A simultaneous closing means selling a house with a mortgage and closing on a new home purchase on the same day. This requires many factors to work properly, including finding a home within your intended price range, knowing how long a wire transfer can take after closing, and having a seller accept your offer. This may be more difficult in a competitive market.

Bridge Loans

Bridge loans can help some sellers/buyers bridge the gap between buying a new home and selling a house with a mortgage. A lender may be willing to issue a temporary loan to help the buyer cover necessary costs, such as real estate commissions and closing costs, until the sale of the current house. 

A home equity line of credit could help some navigate this unique financial situation.

Contingency Clauses

Contingency clauses can also help buyers purchase a new home. A home sale contingency means the buyer’s offer is contingent upon selling their home. If you cannot sell your house, the deal is void, and you’re no longer obligated to accept the offer. In cases of competing offers, find out if a seller can accept another offer while under contract to maximize your opportunities.

Simplify The Process With a Cash Home Buyer

Selling a house with a mortgage and buying a new one can present some unique challenges. Not receiving sufficient offers on your home or buyers backing out at the last minute can make it challenging to pay off your remaining balance, which affects your financial ability to buy a new home.

Finding your new dream home before selling could lead to added costs, such as making a mortgage payment on both properties and paying double the real estate taxes. You may also have to cash out savings to cover the down payment on the new house. Selling to a cash house buyer can help overcome many of these challenges.

Cash buyers can lead to a faster closing date, meaning you can pay off the mortgage faster and speed up your new home purchase. A cash buyer can also offer a fair listing price while still allowing you to benefit from any home equity you have. Skip some of the other costs of a traditional sale that can negatively affect your earnings, including real estate agent expenses.

With a cash sale, you can easily sell a house for its fair dollar value. Contact A-List Properties at (972) 526-7042 or use our online form to receive a fast cash offer.