A mortgaged property sale simply refers to the sale of a property that still has an existing or an ongoing loan balance. In most cases, this should not present any sort of problem for a seller and this is extremely common with most sellers. Hopefully, if sellers either worked with a real estate agent or made a calculation on their own, they should start with a “positive sales” price to make sure that you can easily cover the outstanding mortgage at closing. Of course, the first step for a seller is to check with their mortgage company or bank to see how much money they owe on their mortgage. This is to facilitate a proper accounting and to make sure you are not selling at a loss.
When Mortgaged Property Sales Are Not Simple
When the sales price covers the loan balance, you can be assured that this existing mortgage balance gets paid off during the closing of a property. Of course, you must pay off other fees which will be subtracted from the sales price, and rest, the seller gets to keep as sales proceeds. Be warned, if the mortgage has an escrow, the seller may also get to refund a prorated amount for taxes and insurance. This is a simple example of a mortgage property sale with “positive sales”.
In other circumstances, this process is not as simple as it seems. Please do take a moment to consider all scenarios as some examples of cases of mortgaged property sales might be more complex than others:
What is “Short Sale” or “Negative Sale”, when the sale of a property at market price or sold price is lower than the remaining balance or outstanding loan. This normally happens during a downturn in the housing market or because the property owner has an urgent need to move or relocate for other reasons. Of course, this isn’t an ideal time to try to sell a house; however, the property owner may still have some options.
In this case, it may be possible to approach a lender with an agreement to take a reduced sum to settle the outstanding loan balance. If the lender does agree to a short sale, they may also work with the seller to complete the transaction quickly. Lenders may agree to accept less than they were owed because they figure they will take less of a loss than if they had to pay to pursue a foreclosure and wait even longer to collect any money at all.
Assumed mortgages refer to agreements that allow a new lender to simply assume the old mortgage. These used to be more common when interest rates were higher. Also, most lenders have tightened up their lending standards a lot in the past decade. Some mortgages do have a clause that allows this within the contract, but these are usually either VA or FHA loans. Of course, assuming a loan may be very attractive if the old loan had lower interest rates.
Lenders will typically only allow an assumed mortgage if the new borrower meets their borrowing standards. Otherwise, they are likely to want the new borrower to apply for their own new loan.
Prepayment Penalties On Mortgages
A prepayment penalty is one issue that is more likely to catch average sellers. This is particularly true if the seller wants to sell their house in the first few years after they have taken out a new loan. The lender may have buried the terms for how much of a loan can be paid off at a time within the terms of the mortgage agreement. Paying off the entire loan balance during a sale could generate a prepayment penalty.
For instance, a lender may have terms that say a borrower cannot pay off more than 20 percent of the existing loan balance in any one of the first three years. In some cases, they will allow an outright sale and only have this penalty for refinancing, but a few lenders will impose these penalties under any circumstances. Naturally, lenders would rather have borrowers make payments on time, but they would also prefer borrowers extend the loan if possible in order to keep charging interest.
While these penalties can vary quite a bit, these are some examples of typical penalties for repaying the loan too fast:
- The penalty will typically only last for the first one to three years of the loan.
- Some of these penalties may be as much as 80 percent of interest payments for the next six months.
Even if the lender charges 80 percent of the interest for six months as a prepayment penalty, they will have to exclude the allowed prepayment amount. So, if the allowed amount is 20 percent of the loan, they could only charge 20 percent of that 80 percent in interest as a penalty. Since borrowers usually pay a lot more interest and less principal when loans are new, this can still be a hefty sum.
Selling Properties With A Mortgage Is Very Common
Most mortgages last for 15 to 30 years, so many buyers decide to move before the term of their mortgage ends. This is usually a simple matter, but it can get more complicated in cases where the home is not valued as high as the loan balance, a buyer wants to assume a mortgage, or the loan is new and still has a prepayment penalty.
A friendly note, please consult a Real Estate Agent or the Banks before proceeding further with any sales and if you keen on getting a property please consider Belgravia Green Villas in Singapore.
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