I’m embarrassed that I am a full grown adult, and don’t know how this works. I am so ignorant to it, I didn’t even know how to search Google for the question.
Basically, suppose you buy a home for $200,000 on a 30 year mortgage, and 5 years into your purchase, you manage to find a buyer who will pay $280,000. Of course, you did not pay $200,000 yet after only five years, if someone wants to buy your home.
These are optional guiding questions just so you can see how ignorant I am.
1) Do you get a check for the full 280,000 if they are able to pay in cash?
2) If they’re financing for 30 years instead (since they don’t have cash), do you have to wait 30 years to get your full amount of money? Like, does their monthly mortgage payment go to you?
3) Where does the bank come into this? Or can you bypass that?
4) What happens to the money you paid into the home during that 5 years?
In: 5
(I’m assuming that you’re in the United States, so if you’re elsewhere, some details may vary. None of the following constitutes legal advice or creates an attorney-client relationship.)
TL;DR: Google “HUD-1” for the form that shows how the money calculations work at closing. Google “amortization table” to see how your loan payoff is calculated; it will account for your 5 years’ worth of payments so far. The seller gets whatever the buys pays, minus the payoff of the seller’s loans, minus any other closing costs. And the seller gets it all at closing (the buyer’s loan is between the buyer and the buyer’s lender).
In nearly every real estate transaction, there will be an “escrow agent” that facilitates the transaction. In many places, that is a title insurance company, a lawyer, or a Realtor. The escrow agent acts as a third party that makes sure BOTH sides have lived up to the contract before anything changes hands. So the escrow agent will take in all the money from the buyer (plus all the signed paperwork), the title transfer (and all the signed paperwork) from the seller, and various things from third parties, such as a payoff statement from your lender, title insurance papers from the title insurer, etc. When the escrow agent is satisfied that everyone has provided everything that is needed, then the escrow agent “closes” the transaction, and gives everybody what they’re supposed to get. So, to answer one of your questions: no, you can’t bypass the bank; the escrow agent is going to pay the lender with part of the money that the buyer brings.
The financial side of the transaction will be written out in detail on (in the US) a HUD-1 form. THAT you can google, and you’ll get a copy of the form. It should show the full calculation of what money a buyer is supposed to bring to the closing, and what money the seller will get at the closing. Your realtor and/or escrow agent can and should give you a copy of the form in advance of closing, to review, and you can ask for an estimated HUD-1 any time you want. Just ask for a “Good Faith Estimate” of the HUD-1, and realize that some of the numbers may change a bit.
If you’re not in a transaction now, and just want to know how the calculation typically runs, here goes.
On the buyer’s side, start with the purchase price of the house ($280k in your example). On top of that, there will likely be some extra charges for things like: fees to your lender, prorated property taxes, prorated interest on your loan, a recording fee for recording the title transfer in your county’s property records, etc. If the buyer has agreed to pay some part of the commission (which is unusual), that will appear as well. Together, these charges are referred to as “closing fees” and should all be spelled out on various lines of the HUD-1. The total of the purchase price plus closing fees is the “total due from buyer” at closing. Of course, much of that total is probably supplied by the buyer’s lender; the buyer just has to come up with the difference between the “total due” and the amount of the loan(s).
The seller’s side of the HUD-1 shows similar calculations. The top line of the HUD-1 should show the contract sales price, and then it will adjust for any closing fees that the seller is paying (usually things like real estate commissions, prorated taxes, prorated interest, lender fees for paying off any loans, etc.). From the remaining total, the escrow agent will pay off the seller’s lender(s), and the seller keeps whatever’s left.
If you haven’t dealt with “prorated” amounts before, the concept is simple: you’re paying for “your share” of some cost through the day of closing. So for example, if you’re selling and you close on the 15th of June, you will typically wind up paying 1/2 of a month’s interest to your lender, because it’s been half a month since your last payment. Similarly, you would only be responsible for part of the year’s property taxes (through June 15), while the buyer would be responsible for the rest of the year’s property taxes (from June 16 on), so there will be an adjustment for that as well.
You also asked about what happens to YOUR payments to the bank. In short: they reduce the amount that you owe the bank and thus the payoff to the bank at closing. The details can be a bit complicated, and vary a lot with the type of loan that you have. Generally, the seller will have been paying off interest plus some principal every month, so the loan balance will be less than the original loan. But how much less will depend on the interest rate and how many payments have been made, because only the PRINCIPAL part of the payment reduces the loan amount. If you want the gory details, google “amortization table.” And again, your lender can and should be able to provide you with an amortization of YOUR loan if you ask for one.
To work through a simplified example based on your numbers: Imagine that your $200k loan (assuming you borrowed ALL of the original purchase price – if not, the starting loan will have been less) has been paid down to $180k through normal monthly payments, and that you’re paying your Realtor 6% commission on the $280k sales price. The buyer will have to bring $280k plus their closing costs to the table. You as the seller will start with the $280k (remember, the buyer’s closing costs are paid to other people, not you), and you will need to pay your lender the $180k balance of the loan, and your Realtor 6% of $280k ($16.8k). That leaves you with $83.4k, out of which you’ll still need to pay YOUR other closing costs, like prorated taxes/interest, lender fees, etc. Whatever is left is what you keep, and you get it all right there at the closing.
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