Buying a property is one of the biggest and most significant financial transactions you will ever undertake in your lifetime. For this reason, it is recommended that you choose a property that you can actually see yourself living in for at least the foreseeable future.
When acquiring a property, the sales agreement between you and the lender that is helping to finance the home is also structured with this in mind, and set up with an intended amount of time in which a buyer is required to pay off the home loan. Loan conditions on properties may differ, but in Australia, home loans typically run for terms of between 10 and 30 years, depending on the loan type that is agreed upon and the monthly repayments a buyer can afford.
Many homeowners are unsure of whether they’ll be able to sell a property while the mortgage is still being paid off, as agreed in the terms and conditions set out by the home loan provider. Life happens, and while this may have not been the intention a few years ago, we are often faced with the prospect of having to move when the home is not completely paid off yet.
Considering the constant buzz of the property market, it is easy to imagine that homes are often sold when the mortgage has not yet been paid off. One prominent property group estimates that the average homeowner lives in their property for 13 years before selling it – a far cry from the 30 years it is supposed to take to pay the property off entirely.
Have you been wondering if you’d be able to sell your house before paying off the current mortgage? Read on.
Steps to selling your house before the mortgage is paid off
If you are considering selling a home before its mortgage has been paid off, it is important to note that there are a number of steps you’ll have to follow to make this happen.
Step 1: Contact your lender
First things first: you will have to get in contact with the home loan provider that you enlisted to help you finance the property you own. They will be able to give you an estimate of your mortgage payoff when selling the property. This estimate includes the amount that is still owed on the mortgage, any home equity loans or home equity lines of credit (HELOCs), and the closing costs associated with the sale of the property (things like taxes, agent commissions, etc.). This amount is calculated with the interest down to the day, and is typically valid for between 10 and 30 days.
The lender you are with will also be able to advise you about whether a prepayment penalty – this is an extra fee that you might be required to pay if you sell the property before the loan has been paid off – is applicable to you.
These calculations will give you a good idea of whether you will be able to afford to sell your current property while also being able to afford another property to live in.
Step 2: Set a sale price
Setting a realistic and fair selling price for any given property is an arduous task. Experienced and qualified real estate agents are invaluable when it comes to estimating a price that is attainable, and you should absolutely consider taking an agent on board as your first mate when navigating the tumultuous waters that are the local property market.
If you are still paying off the mortgage on the property you are selling, it is especially important to also take the costs you will need to cover when buying another property into consideration. These may include things like the amount you’ll have to pay as a part of your mortgage payoff, as well as expenses associated with repairs and renovations to your current property in order to get it ready for the market. Another important consideration is the closing costs associated with the transfer of a property when buying it, including agent’s commission, transfer fees, attorney fees and taxes.
The sale price you decide on will also rely heavily on the price of comparable properties in your city or suburb. If the additional costs drive the price you are putting on your property up unreasonably, to the extent that it becomes far more expensive than comparable properties it is competing with, it might be worth discussing holding onto the property until it is more financially favourable to sell, or the selling price is closer to the price of comparable properties.
Step 3: Get an estimated Settlement Statement
As the term suggests, a Settlement Statement (also referred to as a closing statement) will set out all the costs the buyer has to pay the vendor on settlement day – this is the day on which the property is transferred over to the buyer of the property.
These settlement costs include things like stamp duty, the Statement of Adjustments and the First Home Owner Grant, is applicable. As a part of the Statement of Adjustments, additional income and expenses related to the property are also included, like land tax, municipal rates and other periodic expenses.
These costs may change, depending on the actual offer that is made on a property when it is sold, but will help to give you a rough estimate of the kind of profit you stand to make on the sale of your property.
How to sell a home that’s underwater
A foreign term to many laymen, a home that is underwater does not, in fact, refer to a property that is located in the Lost City of Atlantis. Before expanding on the definition on this term, it is useful to distinguish between positive and negative equity. If a homeowner has negative equity on a property, it means that they owe more on the home than it is actually worth at that given moment. In this case, the property will be referred to as being “underwater”.
Although this is not the case for most homeowners, properties may become underwater as a result of taking out a second mortgage in order to stay on top of other debts. This means the homeowner will be responsible for two mortgages at once, making it much harder to fetch a price that is able to cover the costs of both bonds.
As you should gather, selling a home that is underwater is more difficult than selling one when you have positive equity. In this regard, there are a few alternative routes you might think of following.
– Speak to the lender about a short sale
If you find yourself in significant financial hardship but are desperate to sell, the lender you are using might consider allowing a short sale of the property, which means that they agree to reduce the amount that is owed on the balance in order to help you sell. Keep in mind that homes which are short sold usually go for a price that is below the property’s market value, which means that you’ll have to make your own adjustments in terms of what you’ll be able to afford after your current home has been sold.
– Delay the sale of the property
If short selling leaves you worse off, it might be pertinent to delay the sale of the property until you have positive equity.
– Pay the difference in cash
Certainly not an option for everyone, it is possible to consider paying the lender the amount that is owed in cash.
Who is responsible for the mortgage payment while your house is selling?
Take note that, as the homeowner, you will be responsible for mortgage payments until the property has officially exchanged hands. Closing periods on individual properties may differ, but the average amount of time this takes is between 30 and 45 days. Up until the day that the transaction has officially been closed, you will have to keep up with mortgage repayments.
Your Settlement Statement will indicate exactly when the final mortgage payment is to be made – this may be payable at closing – and will also set out any other closing costs.
Can you have two mortgages at once?
This question will depend greatly on the amount of cash you have access to, which will dictate what your debt-to-income ratio is. Juggling two mortgages at the same time is likely to prove challenging to the run-of-the-mill homeowner, necessitating that they wait for the sale of their current property to be completed before attempting to acquire another property.
Contrary to what you might have believed, many, if not most homeowners do not wait before their mortgage is fully settled before selling their current property. Waiting an average of 13 years before starting the property hunt anew gives homeowners the chance to still make a good profit on the sale – provided they have positive equity on the property in question.
If you are thinking of selling your current home while still owing an amount on the mortgage, it is important to follow the correct steps in the process; first speaking to your lender about what exactly is still owed on the property, then setting a sale price and referring to the estimated Settlement Statement.
Should you find it is not financially worth your while to sell the home with its current value and equity taken into account, it may be better to consider holding off on the sale until you are in a better position to do so.
Whenever you are selling, a real estate agent that is experienced and qualified is essential. Still haven’t found an agent you click with? Perfect Agent can help!