SoFi

It’s entirely possible to sell a house with a mortgage. In fact, it’s common to sell a property that still has a mortgage, because most people don’t stay in a home long enough to pay off the home loan.

With the help of your lender and real estate agent, you can move ahead and sell a house with a mortgage. Yes, there’s a bit of paperwork involved, but settling your mortgage at the closing table shouldn’t prove too challenging.

Here’s everything you need to know about selling a home with a mortgage.

What Happens to Your Mortgage When You Sell Your Home?

When you sell your home, the amount you contracted with the buyer is put toward your mortgage and settlement costs before any excess funds are wired to you. Here’s how it works for different transaction types.

A Typical Sale

In a typical sale, homeowners will put their current home on the market before buying another one. Assuming the homeowners have more value in their home than what is owed on their mortgage, they can take the proceeds from the sale of the home and apply that money to the purchase of a new home.

A Short Sale

A short sale is one when you cannot sell the home for what you owe on the mortgage and need to ask the lender to cover the difference (or short).

In a short sale transaction, the mortgage lender and servicer must accept the buyer’s offer before an escrow account can be opened for the sale of the property. This type of mortgage relief transaction can be lengthy (up to 120 days) and involves a lot of paperwork. It’s not common in areas where values are falling or at times when the real estate market is dropping.

When You Buy Another House

There are several roads you can take when you buy another house before selling your own. You may have the option of:

•   Holding two mortgages. If your lender approves you for a new mortgage without selling your current home, you may be able to use this option when shopping for a mortgage. However, you won’t be able to use funds from the sale of your current home for the purchase of your next home.

•   Including a home sale contingency in your real estate contract. The home sale contingency states that the purchase of the new home depends upon the sale of the old home. In other words, the contract is not binding unless you find a buyer to purchase the old home. The two transactions are often tied together. When the sale of the old home closes, it can immediately fund the down payment and closing costs of the new home (depending on how much there is, of course). Keep in mind that a home sale contingency can make your offer less competitive in a hot real estate market where sellers are not willing to wait around for a buyer’s home to sell.

•   Getting a bridge loan. A bridge loan is a short-term loan used to fund the costs of obtaining a new home before selling the old home. The interest rates are usually pretty high, but most homebuyers don’t plan to hold the loan for long.

💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

Selling a House With a Mortgage: Step by Step

Here are the steps to take to sell a home that still has a mortgage.

Get a Payoff Quote

To determine exactly how much of the mortgage you still owe, you’ll need a payoff quote from your mortgage servicer. This is not the same thing as the balance shown on your last mortgage statement. The payoff amount will include any interest still owed until the day your loan is paid off, as well as any fees you may owe.

The payoff quote will have an expiration date. If the outstanding mortgage balance is paid off before that date, the amount on the payoff quote is valid. If it is paid after, sellers will need to obtain a new payoff quote.

Determine Your Home Equity

Equity is the difference between what your property is worth and what you owe on your mortgage (your payoff quote is most accurate). If your home is worth $400,000 and your payoff amount on the existing mortgage is $250,000, your equity is $150,000.

When you sell your home, you gain access to this equity. Your mortgage, any second mortgage like a home equity loan, and closing costs are settled, and then you are wired the excess amount to use how you like. Many homeowners opt to use part or all of the money as a down payment on their next home.

Secure a Real Estate Agent

A real estate agent can walk you through the process of selling a home with a mortgage and clear up questions on other mortgage basics. Your agent will be particularly valuable if you need to buy a new home before selling your current home.

Set a Price

With your agent, you will look at factors that affect property value, such as comparable sales in your area, to help you set a price. There are different price strategies you can review with your agent to bring in more buyers to bid on your home.

Accept a Bid and Open Escrow

After an open house and showings, you may have an offer (or a handful). Consider what you value in accepting an offer. Do you want a fast close? The highest price? A buyer who is flexible with your moving date? A buyer with mortgage preapproval?

You may also choose to continue negotiating with prospective buyers. Once you’ve selected a buyer and have signed the contract, it’s time to go into escrow.

Review Your Settlement Statement

You’ll be in escrow until the day your transaction closes. An escrow or title agent is the intermediary between you and the buyer until the deal is done. While the loan is being processed, title reports are prepared, inspections are held, and other details to close the deal are being worked out.

Three days before, you’ll see a closing disclosure (if you’re buying a house at the same time) and a settlement statement. The settlement statement outlines fees and charges of the real estate transaction and pinpoints how much money you’ll net by selling your home.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Selling a House With a Negative Equity

Negative equity means that the value of an asset (such as a home) is less than the balance due on the loan against it. Say you purchased a property for $400,000 with a $380,000 loan, but then the real estate market took a nosedive. Your property is now worth $350,000, less than the amount of the mortgage.

If you have negative equity in the home and need to sell it, it is possible to sell if you come up with the difference yourself.

In this scenario (an alternative to a short sale), you pay the difference between the amount left on your mortgage note and the purchase offer at closing. So in the example above, if you sold the house for $350,000, at the closing, you would need to pay the loan holder an additional $30,000 to clear the debt.

The Takeaway

Selling a house with a mortgage is common. The buyer pays the sales price, and that money is used to pay off your remaining mortgage, your closing costs, and any second mortgage. The rest is your profit.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Who is responsible for the mortgage on the house during the sale?

The homeowner is responsible for continuing to pay the mortgage until paperwork is signed on closing day.

What happens if you sell a house with a HELOC?

When you sell a home that has a home equity line of credit with a balance, a home equity loan, or any other kind of lien against the house, that will need to be paid off before the remaining equity is paid out to you.

What happens to escrow money when you sell your house?

Your mortgage escrow account will be closed, and any money left will be refunded to you.

Can I make a profit on a house I still owe on?

Yes. You can make a profit if the amount you sell your house for is greater than the amount you owe on it, less closing and settlement costs.

Can I have two mortgages at once?

Yes, you can have two mortgages at once if the lender approves it.

Photo credit: iStock/Beton studio

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOHL0124030

One of the time-honored ways to build wealth and financial stability is by buying real estate. Properties typically appreciate over time and may provide cash flow as well.

Owning your own home not only gives you a great place to live, but it will likely turn out to be a good investment, one that can help build generational wealth for your family.

What Is Considered Generational Wealth?

Generational wealth refers to assets passed on from one generation to another within the same family. Assets is a broad term that includes cash; stocks, bonds and other securities; a family business; and real estate, including the family home.

Because of the high rates of appreciation in the past several decades, real estate can be one of the most valuable assets passed down from one generation to another.


💡 Quick Tip: SoFi’s award-winning mortgage loan experience means a simple application — we even offer an on-time close guarantee. We’ve made $7.5 billion in home loans so we know a thing or two about what makes homebuyers happy.‡

How Does Homeownership Build Wealth?

Homeownership can help build wealth directly through price appreciation. When the value of a home rises, owners are able to sell for that higher price, sometimes moving into a new, larger home. For homeowners who aren’t selling, price appreciation adds to their home equity and overall financial assets.

Of course, if home values decline, as they did in the 2007-2009 Great Recession, the opposite can happen and owners may find they owe more than the home is worth. But real estate has proved to be one of the most reliable assets in the long term.

The bottom line: A person’s home is often their largest financial asset, the benefits of which are often passed on to the next generation.

If you’re just getting started, know that a first-time homebuyer can be anyone who has not owned a principal residence in the past three years, some single parents, and others. The prospective purchasers can often get assistance (such as low or no down payment) as they progress towards buying their first property. Programs such as these can be a stepping stone to building generational wealth.

Direct and Indirect Building of Wealth

Next, consider different ways of building wealth over the generations.

Inheritance

Inheriting appreciated capital assets like real estate, stocks, bonds, ETFs, or a small business can have a big tax benefit, thanks to the “step-up in basis.” The value of the inherited asset is “stepped up” to the fair market value on the date the original owner dies.

If the heir sells the property, the step-up in basis will greatly reduce capital gains taxes due or make them moot if there is no gain. Any capital gain from the sale of inherited property is considered long-term. Current long-term capital gains taxes are 0%, 15%, or 20%, depending on your income and filing status.

For married couples, the death of one spouse results in a partial step-up in most states, but here’s a simplified example. Let’s say you inherit your grandmother’s home, purchased in 1940 for $10,000. The home is valued at $450,000 on the date of her death, which is the stepped-up basis. If you sell the home for $450,000, you’ll pay no capital gains tax. If you sell for a higher sum, capital gains tax will apply only to the amount over $450,000.

Imagine using the stepped-up basis provision over more than one generation of a family. An heir could sell a phenomenally appreciated asset and pay a minimal amount in capital gains tax or none at all on their inheritance, as long as the asset was included in the decedent’s estate.

Indirect Benefits

Heirs of homeowners may well inherit the actual real estate, but generational wealth can also be more indirect. Consider these points:

•   Homeowners are often more financially secure than renters, passing that security on to children.

•   Homeowners are able to borrow against the equity to improve the home (and often boost its value) or take care of other financial needs.

•   Many homeowners are located in districts with high-performing schools, enhancing overall opportunities for their children.

•   Down the line, the equity in a home can help finance retirement and health care needs, shielding adult children from that financial burden.

All of these factors can positively affect the next generation and add to their wealth.

How Discrimination Can Affect Generational Wealth

When housing discrimination occurs, it can keep people of color, women, and families with children, immigrants, and people with disabilities from living in the place they want. Importantly, it can also have a serious impact on generational wealth.

Considering the following statistics from the Fed for the fourth quarter of 2023:

The homeownership rate for non-Hispanic white households overwhelmingly led the pack, at 73.8%. Asian, Native Hawaiian, and Pacific Islander families came a distant second, at 63%. Hispanic families of any race had only a 49.8% homeownership rate, and African American households logged in at 45.9%.

A number of factors have contributed to the race gap in homeownership; not the least is the legacy of race-based discrimination in the housing market.

When homeownership lags among a certain group because of housing discrimination, so does the possibility for generational wealth.


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Understanding Home Appreciation and Home Equity

To understand how homeownership can build wealth, it’s important to understand the concepts of home appreciation rates and home equity. These are some key points:

•   The increase in the value of a home over time is known as appreciation or the appreciation rate.

•   Home equity is the property value minus the outstanding balance of mortgages, liens, or other debt on the property.

•   Your first contribution to home equity is your down payment.

•   Every time you make a monthly mortgage payment, you are paying down the amount you owe and slowly paying part of the principal on your loan, which builds equity.

•   Price appreciation and home improvements can also add to home equity.

Most people purchase real estate with the expectation that their home will increase in value over time. But many things come into play when it comes to home appreciation and the amount of home equity you can build. Some you can control and some you can’t.

Recommended: How Much Is a Down Payment on a House?

The Economy

Housing prices can be affected by several economic indicators. When a recession hits, unemployment rises, or inflation jumps, the real estate market often declines.

Interest rates are also vitally important. Low mortgage interest rates can fuel demand, which can increase home prices in many areas. Conversely, a rise in mortgage rates can have a cooling effect on buyer demand.

The correlation between the housing markets and the rest of the economy can be surprising at times. For instance, during the initial stages of the pandemic, when economic indicators were showing signs of trouble, the nation saw a giant rise in home prices. This was particularly true in rural and suburban areas as urban dwellers sought more space and fewer crowds.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Laws and Regulations

Federal legislation can have a big effect on the U.S. housing market. Government tax credits, deductions, and subsidies aimed at certain homeowners can fuel the housing markets.

Local policies and regulations can also affect housing appreciation. Local investments in infrastructure or new schools and parks can increase your home’s value. Local zoning laws can also have an effect, positive or negative.

Home Improvements

This encompasses everything from an extensive addition to a fresh coat of paint. All kinds of improvements can add to the resale value of your home and, importantly, enhance your life while you’re living there.

Whether you decide to remodel a kitchen, a bathroom, or a remodel a living room, updated appliances and décor and energy-efficient improvements are often valuable upgrades.

To fund them, some homeowners use home improvement loans.

Is Homeownership a Smart Investment?

The answer to that question isn’t always straightforward. First, your home is the place where you live, of course, and hopefully you derive happiness from that. In that sense, the costs associated with your home and your mortgage payment can be considered living expenses, not necessarily an investment.

On the other hand, appreciation and home equity can be seen as the return on your investment in your home.

The sweet spot is often a combination of the two: a great place to live and a profitable investment.

Still, homeowners’ net worth far outpaces renters’. Every three years, the Federal Reserve issues the Survey of Consumer Finances, which compares the net worth of homeowners and renters. The latest report shows that homeowners had a median net worth of $396,200; renters, $10,400.

Keeping your expectations realistic can effectively put your home value into the context of your overall financial wellness and estate planning. To do that, you may need to keep in mind the total costs of owning and maintaining real estate. Too often, people subtract their purchase price from the expected sale price and figure the difference is the return on investment. But there are many more costs involved in homeownership.

To calculate your true return, you’ll want to add up the following:

•   Down payment

•   Closing costs

•   Mortgage points

•   Any mortgage insurance

•   Home maintenance expenses

•   Home improvements

•   Total mortgage payments

•   Taxes

•   Any homeowners association fees

•   Estimated selling costs (such as the real estate agent’s fees and staging charges).

That total is the number you want to compare against home appreciation to determine your actual return.

The Takeaway

How does homeownership build generational wealth? In direct and indirect ways. The real estate itself can likely grow in value, and the homeowner may enjoy such benefits as raising a family in a good school district. Buying real estate can build a foundation for a family today and for generations ahead.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

Photo credit: iStock/Capuski

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.