Do you pay a penalty if you sell your home within six months after you bought it?
You can sell your home any time after you buy it and you are usually not required to own a property for a minimum amount of time. You are only required to pay a penalty if your mortgage has a prepayment penalty and you repay your loan in full within a specified time period when you sell your home.
You should review your mortgage note and other documents to determine if your loan has a prepayment penalty. The mortgage note should outline when you are required to pay the penalty and the amount due.
For a standard mortgage note, the prepayment penalty clause is usually found on page one under "Borrower's Right to Repay." If your note does not contain this language then you can repay your loan in full at any time without paying a penalty.
If your mortgage has a prepayment penalty clause, you are usually only required to pay the fee if you pay off your loan in full before a certain number of years, usually one-to-five years, depending on the length of you loan. The prepayment penalty is typically a fixed fee but may also vary depending on when you repay your mortgage, with the sooner you pay off the loan, the higher the penalty. Any penalty you owe is paid directly to your lender and not the previous property owner or another third party.
We want to emphasize that most mortgages do not have a prepayment penalty. After the real estate crisis in 2008, new regulations were implemented that prohibit prepayment penalties from most mortgage programs.
If your mortgage pre-dates 2008, then your loan may have a prepayment penalty clause but you are likely well beyond the time period when you would be required to pay a penalty if you repay your loan early.
Non-traditional mortgages such as a private money loan -- also known as a hard money loan -- or a seller note may include a prepayment penalty so be sure to review your loan documents carefully if you have this type of mortgage.
The other issues to consider if you sell your home within six months of buying it are real estate commissions, closing costs and the price you sell the home for. The property seller is typically responsible for paying the commission for both the seller’s and the buyer’s real estate agent, which usually runs a combined 4.0% to 6.0% of the purchase price, depending on the property value.
You are also required to pay certain closing costs, including a potential property transfer tax, which can run thousands of dollars.
If you are unable to sell your home for more than you bought it for then you may lose all or part of your down payment after paying commissions and closing costs. For example, if you bought your home for $100,000 and made a 20% down payment ($20,000) and then sell the home for $105,000 but pay $5,000 in real estate commissions and $2,000 in closing costs, you net approximately $18,000 from selling the home, which is $2,000 lower than your down payment.
In this scenario, although you may not be required to pay a prepayment penalty, you lose approximately $2,000 by selling the property. Hopefully your home has increased in value, even in only six months, so you do not lose any money when you sell it.
Finally, if you are in the process of buying a home and think you may sell it within a short period of time, make sure to confirm with your lender that your mortgage does not include a prepayment penalty.
Sources
“What is a prepayment penalty?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.
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