What Happens to Old Home Loans When Selling a House?

Example 2: Selling a house with a mortgage and equity loan

If you have both a mortgage and a home equity loan or a home equity line of credit (HELOC), both loans must be repaid at closing. The challenge is that some homeowners may not realize their home equity loan isn’t rolled into the primary mortgage. It’s a separate debt or “second mortgage” that must be settled before finalizing your sale.

Here’s an example of how this scenario might break down:

• Home sale price: $415,000
• Remaining mortgage balance: $252,505
• Home equity loan balance: $46,700 (national average)
• Estimated closing costs: $25,000
• Total loan payoffs: $299,205 ($252,505 mortgage + $46,700 equity loan)
• Net proceeds after loan payoffs and closing costs: $90,795

Because of the additional home equity loan, the seller’s net proceeds drop to $90,795. However, this example still results in a profit.

Example 3: Selling a house that’s underwater

An underwater mortgage happens when you owe more on your home than it’s worth. This can happen due to market fluctuations, a high-interest loan, or taking out a large home equity loan. If you sell while underwater, the sale proceeds won’t be enough to fully pay off your mortgage, leaving you responsible for the remaining balance.

Here’s what this situation might look like:

• Home sale price: $380,000 (home value dropped below purchase price)
• Remaining mortgage balance: $410,000
• Estimated closing costs: $22,800 (estimating 6% of the sale price)
• Total loan payoffs and costs: $432,800
• Deficiency (amount still owed to the lender): $52,800

Because the home’s value has declined, the seller must either bring $52,800 to closing to cover the shortfall or explore alternatives:

What can you do if your home is underwater?

• Negotiate a short sale: A short sale occurs when your lender agrees to accept less than the full mortgage amount you owe. This requires lender approval and can impact your credit, but it allows you to sell without covering the entire debt deficiency.
• Consider loan modification or refinancing: If you can stay in the home, a loan modification or refinancing may lower your payments and make it more affordable until the market (or your situation) improves.
• Rent the property instead of selling: If selling at a loss isn’t feasible, turning the home into a rental could allow you to cover mortgage payments until the value increases.

Example 4: Selling a house in foreclosure

If you’ve fallen behind on mortgage payments and your lender has started foreclosure proceedings, you still have a chance to sell the home before losing it to auction. However, your timeline may be short, and lender involvement will be necessary.

Here’s how this situation could unfold:

• Home sale price: $415,000
• Remaining mortgage balance: $252,505
• Past-due mortgage payments and fees: $15,000
• Estimated closing costs: $25,000
• Total loan payoffs and costs: $292,505
• Net proceeds after paying off debts: $122,495

Because the home has equity, the seller in this example can use the sale to pay off the mortgage and avoid foreclosure. However, as in our earlier example, if the home’s value had dropped below what’s owed, this would require negotiating a short sale with the lender.

What are your options if your home is in foreclosure?

• Sell before the foreclosure auction: If you have equity, selling quickly through a cash buyer or an agent experienced in foreclosure sales can help you avoid damage to your credit.
• Negotiate a short sale: If your home is worth less than your mortgage, your lender may agree to a short sale to recoup some of the balance rather than foreclosing.
• Look into other alternatives: If you want to keep the home, options like mortgage forbearance, loan modification, or filing for bankruptcy (in some cases) can temporarily halt foreclosure proceedings.

How Much Is Your Home Worth Now?

Home values have rapidly increased in recent years. How much is your current home worth now? Get a ballpark estimate from HomeLight’s free Home Value Estimator.

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Common questions about selling a house with a mortgage

When do I stop making mortgage payments when selling a house?

You should continue making your monthly mortgage payments until the home sale is finalized and your loan is officially paid off at closing. As with any loan, missing payments before repaying the full amount could result in penalties or damage to your credit score.

Can a seller assume my existing mortgage loan?

Not all mortgages are assumable, meaning the buyer can take over your existing loan under the same terms. If you have a government-backed loan, such as an FHA, VA, or USDA loan, your lender may allow assumption under the right conditions. Check with your lender to confirm if your mortgage qualifies.

What happens to escrow money when I sell my house?

If you have an escrow account for property taxes and homeowners insurance, your lender will return any remaining funds to you after the mortgage is paid off. This refund typically arrives within a few weeks of closing.

How much does it cost to sell to a house-buying company?

“We Buy Houses for Cash” companies typically don’t charge commissions, but they usually offer below market value to account for repairs and resale costs. However, larger iBuyers like Opendoor and Offerpad that purchase homes in good condition charge a service fee of about 5% of the home’s sale price. So if you sold a $415,000 home to one of these companies, you might pay a fee of $20,750. If you’d like to compare a cash offer to what a top agent might get for your home, try HomeLight’s no-commitment Simple Sale platform.

What’s the biggest mistake first-time home sellers make?

Overpricing the home. Many sellers set the price too high, assuming they can negotiate down. However, overpriced homes often sit on the market too long and may require price reductions, leading to lower final offers. An experienced real estate agent can help price your home competitively from the start.

What happens if I sell my house right after buying it?

You can sell soon after buying, but be aware of potential prepayment penalties, closing costs, and capital gains taxes. If you’ve lived in the home for less than two years, you may owe capital gains taxes on any profit unless you qualify for an exemption.

How can I sell my house quickly if I have a mortgage?

Selling to a cash buyer or working with an agent who specializes in fast sales can help. HomeLight’s Simple Sale connects you with buyers who can close in as little as 10 days, eliminating the uncertainty of the traditional market. To get a no-obligation cash offer in 24 hours, simply answer a few questions about your home and selling timeline.

Can I buy before I sell if I have a mortgage?

Buying a new home before selling your current one can be a balancing act, especially if you’re trying to carry two mortgages. However, there are solutions that can help you manage this transition. One is a traditional bridge loan, which is a short-term loan that allows you to “bridge” the financial gap between selling and buying. A more modern solution is a buy-before-you-sell program, like HomeLight’s Buy Before You Sell that lets you unlock the equity in your current home so you can make a strong, non-contingent offer on your new house — and only move once. Watch this short video to learn more.

Ready to sell your home? Use HomeLight’s free Agent Match platform to find a top agent who understands your local market and can guide you through the process. We analyze nearly 30 million transactions and thousands of reviews to determine which agent is best for you based on your needs.

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