Can You Sell a House With a Fixed Mortgage?

Selling a home with an outstanding fixed mortgage is possible. Understanding how your existing mortgage interacts with the sale and the financial aspects is important for a successful transaction.

The Process of Selling a Home with a Mortgage

The process of selling a home with an existing mortgage begins by preparing the property for the market, which often involves repairs, staging, and professional photography. Once ready, the home is listed for sale, typically with a real estate agent who helps set the asking price and markets the property to potential buyers. After receiving an offer, negotiations occur between the seller and buyer, culminating in a purchase agreement that outlines the terms of the sale.

The closing or settlement agent facilitates the transaction. This agent, often an escrow company, title company, or attorney, manages the funds and documents involved in the sale. They ensure all conditions in the purchase agreement are met before finalization.

At the time of closing, the existing mortgage is paid off using the proceeds from the home’s sale. The closing agent obtains a payoff statement from the seller’s mortgage lender, which specifies the exact amount needed to clear the loan, including the remaining principal, accrued interest, and any associated fees. The buyer’s funds are then used to directly pay this amount to the seller’s lender, ensuring the mortgage debt is satisfied. Once the mortgage is fully paid, the lender is legally required to release the lien on the property, formally acknowledging that their claim to the property is no longer valid. This lien release is typically recorded with the local county recorder’s office, clearing the title and transferring full ownership to the buyer.

Understanding Your Fixed Mortgage Details

Before selling a home with a fixed mortgage, it is important to review the specific terms of your loan agreement, as certain clauses can impact the sale. One such term is a prepayment penalty, which is a fee charged by some lenders if a mortgage is paid off early, before the scheduled end of its term. This penalty compensates the lender for the interest income they would lose due to the early repayment. Prepayment penalties can be calculated in various ways, such as a percentage of the remaining loan balance (often 1% to 2%), a flat fee, or an amount equal to a certain number of months’ interest. Federal law typically limits these penalties to a maximum of 2% of the loan amount.

Another feature that might be present in a mortgage agreement is portability, which allows a homeowner to transfer their existing mortgage, including its current interest rate and terms, to a new property. While this can potentially save time and costs associated with obtaining a new loan, mortgage portability is uncommon for most fixed-rate mortgages and usually requires the lender’s approval. Homeowners should contact their mortgage lender or review their original contract to determine if their specific fixed mortgage offers this feature.

An assumable mortgage allows a buyer to take over the seller’s existing mortgage, continuing to make payments under the original loan terms. Fixed-rate mortgages are generally not assumable, especially conventional loans, as most include a “due-on-sale” clause that requires the loan to be paid in full upon the property’s transfer. However, some government-backed fixed-rate loans, such as those insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), can be assumable, though the buyer must still qualify with the lender and meet credit and income requirements.

Financial Considerations When Selling

Selling a home involves various financial considerations beyond simply paying off the mortgage. Sellers incur several costs that reduce the net proceeds from the sale. Real estate commissions typically constitute the largest expense, with rates often ranging between 5% and 6% of the home’s sale price, usually split between the listing agent and the buyer’s agent.

Other common seller closing costs include title insurance, which often costs around 0.5% of the sale price, and escrow or settlement fees, which can vary widely but might range from a few hundred dollars up to 0.5% of the purchase price. Additionally, sellers may pay attorney fees, transfer taxes, prorated property taxes, and potentially contribute to buyer credits for repairs or closing costs. Overall, seller closing costs, including commissions, can amount to roughly 6% to 10% of the sale price.

To determine the net proceeds from a home sale, the total selling costs and the outstanding mortgage balance are subtracted from the final sale price. The remaining amount is the cash a seller receives.

The sale of a home can also have tax implications, specifically regarding capital gains. A capital gain occurs when a home is sold for more than its adjusted cost basis (original purchase price plus the cost of improvements). The Internal Revenue Service (IRS) offers an exclusion for capital gains on the sale of a primary residence. Single filers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000.

To qualify for this exclusion, the homeowner must have owned and used the home as their main residence for at least two out of the five years preceding the sale. This two-year period does not need to be consecutive. It is advisable to consult a tax professional to understand the specific tax consequences of a home sale.