Many homeowners want to sell their home before they’ve completely paid off the mortgage—especially since most mortgages are 30-year terms. Selling a house with a mortgage is quite possible, but there are a few things you should know about the process.
Selling your home with an existing mortgage balance is certainly possible. In fact, many homeowners do just that if they’re looking to upsize or downsize before the end of the loan term.
With VA mortgages, you can technically sell the home whenever you want. The VA has no requirements when it comes to the timeframe of selling the home.
Your lender may prefer you to stay in the home for at least a year, but you can sell before that time period with a legitimate reason such as a PCS.
When you sell a home, the funds you receive as part of the sale should pay off part or all of your remaining loan balance and closing costs. If there is any money leftover, it goes directly to you. This is the case if you have enough equity saved in your home. But in cases where you want to sell the home soon after purchasing, things may not be so simple.
In either instance, the first step is to talk to your lender. They'll be able to determine your mortgage payoff amount and current home equity.
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Your mortgage payoff amount is the amount needed to close the loan. This is slightly different from your remaining balance, as it includes accrued interest and other fees the lender might add. It’s important to note that a payoff quote has an expiration date, which is usually between 10 to 30 days. After that, you’ll need to get an updated one.
Home equity is the financial stake you have in your home. It's the difference between what you currently owe on your mortgage and what your house is worth on the market. Equity also represents what you earn on your home when you sell it, minus the loan payoff and other sales-related expenses. Subtracting the amount owed on your mortgage from the approximate market value of your home will help determine your total home equity.
Negative equity is when your loan amount is larger than what your house is worth on the current market. This can make it difficult to sell or refinance your house. Below are some examples where you might have negative equity:
A short sale takes place when your lender lets you sell the home for less than what remains on the loan. This allows the lender to recoup at least some cash, while avoiding the hassle and expense of foreclosure.
Keep in mind that a short sale could negatively impact your ability to purchase a new home in the future. Additionally, you’ll forfeit your original down payment and your credit score will likely take a hit.
A HELOC is a line of credit that uses your home equity as collateral. This means you can pull out money from your earned equity without having to sell your home.
HELOCs consist of a draw period and a repayment period. These periods can last anywhere from 15 to 30 years and can put your home equity into negative territory, making it more difficult to sell.
A cash-out refinance creates a new loan on your home, allowing you to convert your home equity into cash. You can borrow up to 90% of your home's value, as long as you meet specific VA guidelines which include at least six monthly payments on your current loan, and a refinance date at least 210 days after the first payment was due on your current loan.
While this option can give you extra cash similar to HELOCs, it also can create negative home equity.
During a typical home sale, you should be able to sell your home for more than what you owe on the mortgage. Those funds are typically used to pay off additional expenses from the sale, with the leftover representing your profit. It is important to check your estimated profit from selling your home before starting the process, so you have an idea of how much equity your house has.
Here's how the proceeds from your home sale are directed:
The majority of funds generated from the sale will first go toward the remaining mortgage balance on the home you sold. In most cases, you should be able to pay that loan off, with some funds left over.
If there are existing home equity loans or tax liens against the house you sold, this must be paid off by the sales proceeds. These loans might include HELOCs or second mortgages.
Other fees connected to home sales can include agent commission, transfer taxes, title insurance fees, attorney costs and any repairs or remediations made to the home.
Anything remaining after the above has been paid off is your profit; you can do whatever you wish with that extra money.
Every time you use a VA loan, you lose a portion of your VA loan entitlement. Your entitlement is tied up with your property until the loan is fully repaid. If you sell your home and pay off the loan balance, you can restore your entitlement. If you're selling your home through a short sale, however, you won't be able to pay the entire loan back.
This means that the portion of your VA entitlement used on your home loan will no longer be accessible. The only way to restore that entitlement is to reimburse the VA, which is typically not a good financial decision. However, you could have enough remaining entitlement, or what’s called second-tier entitlement, to purchase a future home without a down payment.
It is possible to sell your home with an existing mortgage, and many homeowners do just that. For more information, talk with a loan specialist here at Veterans United concerning next steps and available options.
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