Everything about homeownership

How Do You Get Paid When You Sell a House?

SELLING YOUR HOME

You will most likely sell your home in less than 10 years, per NAR’s 2020 Consumer Profile Report. When you sell your house before your mortgage is paid off, you should know how much you get!

Let’s take Sally, as an example.

Five years ago: She bought a $500K home with 10% down, 10% from Home.LLC, and 80% from a bank on a 4% 30-year loan.

In those 5 years, she made regular mortgage, tax, and insurance payments & didn’t get any liens on her property (e.g. mechanics lien). So in 5 years she would have paid off about $38K.

She’s also selling the property in a similar condition she bought it for.

Now, she’s selling her home for $600K, or a $100K appreciation.

How will everyone get paid?

The future buyer & their bank will deposit all their money in an escrow, which will disburse funds to the lien holders of the home.

Who gets paid & in what order?

The first lien is held by Sally’s bank, so they will get paid first. They originally gave a $400K loan but Sally paid off about ~$38K. So the bank will get back ~$362K. 

The second lien is held by Home.LLC, so they will get paid second. They originally invested $50K in down payment adjusted by 50% of the $100K appreciation. So they’ll get $100K. 

Then, Sally gets the remaining amount. She gets $138K, which is 

   $50K original investment 

+ $38K (from regular mortgage payments)

+ $50K (50% of the $100K appreciation) 

That $138K is probably enough for buying a $650K-$700K home!

What happens if Sally’s home loses value?

Let’s say that Sally sells her home for $450K, or a $50K loss after 5 years.

The first lien is held by Sally’s bank, so they will get paid first. They originally gave a $400K loan but Sally paid off about ~$38K. So the bank will get back ~$362K. 

The second lien is held by Home.LLC, so they will get paid second. They originally invested $50K in down payment – 50% of the $50K loss. So they’ll get back only $25K. 

Then, Sally gets the remaining amount. She gets $63K, which is 

   $50K original investment 

+ $38K (from regular mortgage payments)

– $25K (50% of the $50K loss)

Sally’s loss was reduced by $25K, which was borne by Home.LLC.

How do you buy your next home?

Ideally, you want to sell your home first before buying your next one. In that case, you can use your proceeds towards the downpayment plus your lender might give you a better interest rate on your loan as you’ll have no outstanding mortgage payments.

Otherwise, if you buy your next home first, you will have to get down payment funds plus your lender will see an unpaid mortgage on your previous home.

In that case, you can try buying using a contingent offer, so your next home doesn’t close till your first home sells. 

Otherwise, you can get funds for your down payment by

  • Getting a bridge loan: Get a temporary bridge loan like a HELOC on your old home or a piggyback mortgage on your new home. You can pay off the bridge loan when you sell your previous home. Note that this may come with additional closing costs.
  • Getting Home.LLC’s down payment assistance: You can use Home.LLC’s funds to cover the down payment for your new home. 

Anshika Burman

Anshika is a top-ranking graduate from Symbiosis International University. Previously, she worked in corporate finance at Dabur. She joined Home.LLC while pursuing her CFA.

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