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April 23, 2020

What Happens To Your Mortgage When You Sell Your Home?

Thinking of selling your home for one reason or another and don’t know what will happen after the sale? Here are some facts on what becomes of your mortgage once you’re done

Recent trends have established that most homeowners do not stay in their homes until they have fully paid off their home loans. If you decide to take a home loan, your lender will place a mortgage on your property, which usually appears on the title of your property and signifies that your lender has a formal interest on your property.

You may wonder if you can sell your home before clearing your home loan. The answer is yes. When you decide to sell the house and lose ownership, your lender also loses any right to sell it. By losing this right, the lender expects that you repay all the money they previously lent to you. This scenario is a discharge of mortgage.

Below is a detailed explanation about what will happen to your home loan when you decide to sell your home.

You Can Arrange for a Discharge of Your Home Loan

When you decide to sell your home, you will have to arrange for a discharge of your home loan before any form of settlement takes place. It may involve completing a formal way of discharge, signing it, and taking it to your lender for processing. It is vital to note that the discharge process may take two or three weeks, so it is important to start is as soon as possible to avoid any delays during the settlement period.

After submitting your discharge of the home loan application, your lender will speak to your estate agents and arrange that they be present during settlement. They will also arrange to receive any money owed to them from the sale proceeds. 

Your lender will take care of registering the discharge of the home loans at the Land Titles Registry located in your state to declare that they no longer have any interest in the property.

There are fees involved when you discharge your home loan, including the discharge fee and break costs that arise in case you have a fixed-rate loan. Some lenders may also charge a fee when you pay off your loan early. Early may be within the first five years. The lenders may add these fees to the amount that they will take from your sale. 

What Happens During a Typical Sale?

During a typical property sale, even when you sell house online, you can obtain proceeds from selling your home at a higher price than what you currently owe on your home loan. If you have diligently been paying the mortgage over the years, then you will have created equity in your home, which you can then cash on after selling.

When selling and a willing buyer has settlement funds equal to your property sale price, you can use the funds to pay off the following:

  • Any outstanding closing costs including estate agents commissions and any unpaid taxes
  • Any remaining amount of your home loan
  • Equity loans that you may have

If there is any cash left after paying off all the debts, then that is a profit. You can use the profit in any manner that you deem fit, including transferring it to your bank account or making a down payment for your new home.

What Happens When the Sale Proceeds Do Not Cover Your Home Loan Balance?

At times, you may sell a family home for less than what is enough to cover your home loan balance. This is having negative equity. It mainly happens in cases where property markets soften, especially when during borrowing, there was a very high loan to value ratio, and you have not had the property for an extended period.

When this happens, you must discuss with your lender asking them to accept the loss because the sale proceeds are less than what you owe them. The lender may accept this, or in certain circumstances, they will have to take specific steps to ensure that they recover their money before allowing settlement or discussions with cash buyers for houses to proceed. The lenders may request you to fill the amount by selling some of your valuable assets or by digging dip into your savings to top up the deficit.

In some cases, the lender may turn to the home loan insurer to have them cover the deficit. The insurers will then try to recover this money from you. 

It is advisable to consider selling at a higher price than what you owe your lender to avoid this misfortune.

You May Want to Sell and Buy Another House at the Same Time

If you want to sell and buy another house, you should consider selling first. Looking for cash buyers for houses will enable you to have enough cash to buy a new home. When you sell a family home, first, you can use some of the proceeds obtained to make a down payment for your new home.

If you decide to buy first, which is a tough decision, you may need to work harder when arranging the details around both transactions. A common option involves carrying two home loans. It is not fun having two loans, but if you can afford it, this is the best and simplest option until you can find a buyer for your old home.

When you want to put your home up for sale, you should find an expert who is experienced in overseeing the process and all the transactions involved. It ensures that the selling process runs smoothly.

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