When you take a loan from the bank or financial institution to assist you or finance your purchase of a house, the house will be pledged to the bank as a collateral or security. In the event that you defaulted in the monthly instalment, the bank can foreclosure or take action to auction off your house to recover the loan you owed to the bank.
If the individual title has been issued the title will be pledged to the bank known as a “Charge”. If the individual title has not been issued the house will be pledged to the bank by way of an “Assignment”.
The usual home loan repayment tenure can range from anywhere between 10 – 35 years, and many situations can take place within your life during this time. You may need to relocate for work, for your children’s education, or for your retirement. Sometimes, you might just feel that the house you bought is no longer right for you.
While there may be many reasons you would want to sell your home, is it possible to do so if you haven’t paid it off yet? The answer is yes!
Your home loan’s bank can be the only problem in selling your home before you have paid it off because the bank has a right over your house and the documents required such as original title or the original sale and purchase agreement (“SPA”) and deed of assignment (“DOA”) are kept by the bank as security. . In technical terms the bank has priority interest over your house. If you default on your repayments either through missed or inadequate payments, the bank is entitled to repossess the property and have it sold in auction to reduce the debt. That said, most banks are still willing to work with the seller under certain circumstances. So what can you do about it?
Here are three initial steps that you can follow before selling a home that is still pledged to the bank.
Step 1: Contact Your Bank
First, ask your bank about the remaining amount of your loan before selling your home. The quote known as the redemption statement that you will receive is usually valid for 10-30 days and may slightly differ from your monthly statement. The redemption statement will contain the amount that you need to pay in order to redeem your loan.
You should also check your loan documents to see if there’s a prepayment penalty, as that will affect how much you will receive upon selling. It is an amount that you may have to pay if you sell before your loan is completed. This fee can be calculated in different ways, depending on each bank. It could be a percentage of your remaining loan balance, a percentage of owed interest or a flat rate. Usually if you try to redeem your loan within the first 3 or 5 years of your loan, the bank may impose some penalty for early redemption.
Step 2: Set A Sale Price
Set a reasonable sale price for your home with the help of a property agent. Ideally, you should be able to sell your home for an amount that will cover your loan settlement along with all other expenses that will incur with the sale.
Upon sale, you may get a sum of profit, which will come in handy for your down payment to buy a new home.
Step 3: Get An Estimated Settlement Statement
Ensure that the sale of your home is worth the costs, which means the profit or return that you will get upon the sale is sufficient to cover all the expenses that come with the selling process.
You would need to find out how much is owed to the bank, the agent’s commission, the amount of real property gains tax to pay, legal fee and other costs connected to selling a property.
What Should You Do When Faced With Negative Equity?
Sometimes, a homeowner will face negative equity, a situation where they owe more on their home loan than its current value. Sellers often end up with negative equity when they take a second loan to cover other expenses or debts or the monthly instalment repayment has been irregular. But when it’s time to sell, , the sum owing to the bank coupled with the cost involved are higher than the property value for sale and to make matters worse, the property market would have declined.
It’s not impossible to sell your home if you are facing this situation, but it does come with a few setbacks. Here are your options:
- Delay the sale: If your situation allows it, stay in the home and keep paying your loan until the property market improves. You could also rent your home so that the rental payments will be able to cover the loan during the waiting period.
- Pay with cash: This is only practical if you have the extra cash available and you are unable to wait until the market is better.
- Sell and top up: If you are short of cash and facing dire difficulty to meet the monthly instalments you can put up the property for sale and though the sale price may not be enough to cover the bank’s outstanding loan, you will have to secure other sources of funds to pay the shortfall. When you are facing dire financial difficulty, it is better to sell off your house rather than failing and default in your monthly instalment by making irregular payment, as irregular instalments will only cause more harm than good as the bank may impose late penalty interest and other charges may soon follow to the extent the loan owing may snowball to a unsustainable amount that you can no longer able to pay at all. Cut your losses is better than having to continue paying late penalty interest.
Do I Need To Pay Off The Loan Before Selling?
Settling your home loan before selling might seem like a good way to avoid loan payment confusion, but it is only practical if you have enough cash.
You don’t have to pay off your loan before selling. You just have to make sure that the sale price is sufficient to pay off the loan, real property gains tax (if applicable) and other costs.
When you sell your house which is still under a loan, the purchase price to be paid by the buyer will be deposited with a stakeholder lawyer who will then assist you to pay off (redeem) your loan, or if the buyer also take up a loan, your owing to the bank (redemption) will be settled off from the loan took by the buyer.
Redemption
When your loan is redeemed (settled off), the bank will release the charge or assignment on the house and that will allow the buyer to become the new owner.
When your house is redeemed:
- If individual title has been issued, the bank will release the original title and the charge will be discharged; or
- If individual title has not been issued, the bank will reassign the property to allow you to assign the property to the buyer to become the new owner.
With all the items above in mind, we surely hope you understand the steps that you can follow before selling a home that is still pledged to the bank. If you need any assistance in selling your home, feel free to drop us a message here.
The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.
