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Will You Lose Your House If You File Bankruptcy
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You want to sell your home, prepare to move on. But you took out a mortgage to buy it, which you’re nowhere near paying off. And you are worried: Will it block the sale, if there is still a significant amount left on the loan?
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In fact, a mortgage is technically a lien on your home, meaning that someone else (namely your lender) has a claim on the property. However, unlike other encumbrances, it is not usually considered a cloud on title – because it is so common, and because it is easy to settle.
“Most people who sell their homes have unpaid mortgages,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York City and Florida. “Having a mortgage does not prevent the sale of a home, as long as there is enough equity to pay it in full when they close.”
In short, yes, you can sell your home even if you still owe money on the mortgage. It’s actually quite common for people with mortgage debt to do so. But you must settle the remaining balance when you complete the sale; it’s often part of the round of cash checks that happens during closing. This expectation that you will use the proceeds from the sale to repay the debt is why the lender allows the sale to go ahead.
Equity is the key to selling a mortgaged property. Basically, the home’s equity is equal to the value of the home minus the outstanding mortgage balance. For example, if your home is worth $250,000 and you owe $100,000 on the mortgage, you have $150,000 in equity. This is the amount of cash, minus your closing costs and expenses, that you will receive when you sign the final purchase agreement and complete the home sale.
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This positive equity is necessary for you to be able to pay off the loan by using the proceeds from the sale. As long as you sell your home for more than the outstanding balance on the mortgage, you will be able to repay the mortgage.
You can increase your home equity by paying off the loan balance or realize an increase in the value of your home, either through natural changes in the market or by implementing upgrades that increase the value.
If you can afford it, a great way to increase your equity is to make a 13th mortgage payment each year and have it applied to the principal. This pays off your mortgage faster by reducing the interest paid on the outstanding balance.
Keep in mind that you’ll have to pay closing costs when you sell, which can include realtor commissions and more. So if your equity is barely positive, it might not be enough. If you don’t have enough equity in the home to repay the mortgage with the proceeds from the sale, you’ll need to use other means – such as savings – to make up the difference.
Can I Keep My House If I File For Bankruptcy?
The one case where you may have problems selling a home with a mortgage is when you have negative equity. Colloquially known as being underwater or upside down, it basically means that the home is worth less than the amount you owe on it.
Imagine you buy a home for $300,000, put the usual 20 percent down and borrow $240,000. Alas, the local real estate market tanks, and you discover that for just $215,000 you can sell the home. If you still owe $225. 000 to the lender, you will not be able to sell your home at a price that allows you to repay what you owe. You are under water.
Generally, you must pay off all mortgages or loans secured by a home when you sell the property. You can list the property for sale and go through most of the process while still owing a balance, but you must repay the loan as part of the sale. Here are four steps to follow.
The first thing you need to do if you are considering selling your home while you have a mortgage on it is to contact the lender and ask for a disbursement statement or letter. This document tells you how much you have to pay the lender when you sell. The payment amount will change each month, even on a fixed rate mortgage, as you make monthly payments. So be prepared to get a new declaration when the deadline is set.
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The payout statement has instructions on how to submit
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