Can I Sell My House After Five Years if I Have a Mortgage?


You have made all of your mortgage payments on time for the last five years, but you are now confronted with the prospect of selling your house for one of a variety of reasons. Even if they still owe money on the mortgage, homeowners are not prohibited from selling their homes after five years for any reason. If the house fits the standards to be considered a principal residence, the Internal Revenue Service (IRS) will provide you a significant capital gains exemption after just two years. The primary cause for worry in this scenario is the little amount of equity you have accrued over the course of those five years, in addition to the fees you incurred when you first purchased the house and the costs associated with selling it.


One piece of sound advise about real estate is to remain in the same house for at least five years. At the first five years of your mortgage, the majority of your payment will go toward covering the interest, and just a little portion will go toward the principle; as a result, you will have very little equity during this time.

Facing an Upside-Down Mortgage

After the property market crashed in the years after 2008, many homeowners found themselves saddled with enormous mortgage obligations and properties whose values were far lower than their outstanding debts. An upside down mortgage is the term used to describe the situation in which a borrower owes more on a mortgage than the value of the property. Even if the housing market has improved much in many regions, it is still conceivable for an investment property to decrease in value rather than increase in value over the first five years of ownership, despite the fact that the market has improved significantly in many regions.

You may pay down the mortgage and sell the home at market value. Borrowers do not often investigate this possibility since it typically requires an investment of tens of thousands of dollars on their part. The most prudent course of action would be to consult with the mortgage lender in order to determine whether or not they would permit a short sale. In this scenario, the lender will give you permission to sell the property for an amount that is lower than its worth and will forgive the remaining balance of the loan in order to stop the foreclosure process.

Take, for instance, the scenario in which you purchased a property in San Francisco for $1 million with a mortgage of $900,000. After five years, the house is now only worth $850,000, but you still have a mortgage payment of $885,000. You are in the red by $35,000 at this point. Instead than taking the chance that the possible loss may be increased via foreclosure auctions, the bank will rather write off $35,000 through a short sale.

Consider IRS Penalities

When it comes to selling a property, there are many different things to think about. You are required to record a capital gain if the item is sold for more than its original cost basis. You are required to disclose a capital loss if the sale resulted in a monetary loss. If you have lived in the house as your primary residence for at least two of the preceding five years, you may be entitled for a capital gain exclusion of up to $250,000 if you are filing as an individual or up to $500,000 if you are filing as a married couple.

When you sell your home through the short sale method, you end up losing money. Bear in mind, however, that the bank retains the ability to pursue legal action against you for the sum. However, you will get a Form 1099-C, Cancellation of Debt, from the bank, which must be included in your tax return even though the bank will write off the loss.

Considering Other Options

If you are able to continue living in the house, you might think about applying for one of the many additional FHA and government programmes that are meant to assist homeowners who are experiencing financial difficulties. The Federal Housing Administration (FHA) provides counselling services conducted by foreclosure prevention professionals. There are programmes available to assist with lowering mortgage payments, such as the Home Affordable Modification Program, and others, such as the Principal Reduction Alternative, which assists you in negotiating with lenders to lower the overall loan amount.

If you have a low amount of equity in your house and need to relocate because of a job transfer or relocation, you may want to think about renting the property out for a few years until the finances are more in your favour.