Can You Sell a House with a HELOC?
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A Home Equity Line of Credit (HELOC) allows you to borrow against the value of your home. Most lenders will allow you to borrow up to 85% of the equity you have in your home, and you can use the funds for a variety of things.
Some people take out HELOCs when they have home repairs or renovation projects in mind, while others use these lines of credit to cover wedding costs or student loans.
One common question that homeowners have when considering this option is if they can sell a house with a HELOC or home equity loan. It is possible, and often easy to complete these processes. Here’s everything you need to know about selling your house with a HELOC.
Can You Sell a House with a HELOC?
It’s possible to sell your home if you have an outstanding home equity loan or HELOC. The title company will take the sale proceeds and use them to pay off your HELOC and mortgage before distributing the profits to you. They will also distribute any other closing costs, like agent commissions.
Selling a house with a home equity loan only becomes complicated if the size of the loan, mortgage, and other closing costs exceed your profits. This means you are “underwater” on the loan and will need to pay off the difference. You no longer own your home but are still responsible for the debt.
Instead of trying to sell your home with a HELOC, consider paying it off instead before listing your property. There are a few benefits of paying off your home equity loan:
- There will be a clear title: A HELOC is considered a lien against your house, which will come up in a title search. Lenders might be wary of buyers with outstanding liens, even if they would be resolved at closing.
- It will create a smoother transaction: Most title companies and lenders are used to people selling their properties with home equity loans and will work to resolve any issues. However, clearing this loan could take longer than you expect.
- You and your buyer can avoid surprises: No one wants unexpected delays in the home sale or purchase process. Clearing your home equity loan means there is one less problem to worry about.
The decision to sell your house with an existing home equity loan will depend on the debt versus the value of your home. Some people prefer to wait until closing to clear these lines of credit so they don’t have to worry about paying off large sums of money.
What Happens to Your HELOC If You Sell Your House?
When you sell your house, the title company calculates the home sale proceeds based on the closing costs, remaining mortgage, and home equity loans. These costs are paid off at the closing appointment and the remaining profits are distributed into your bank account.
For example, if you sell your house for $500,000 and have $100,000 remaining on your mortgage plus a $200,000 home equity loan, then your profits are around $300,000. Seller closing costs can reach up to 10 percent of the home’s value, which means you might receive around $250,000 in total profits.
Paying off a home equity line becomes more complicated when your debt exceeds your profits. If your home sale profits are $225,000 and you own $250,000 in mortgages, loans, and closing costs, then you would be underwater by around $25,000.
Once the HELOC is fully paid off, the lien on the house is cleared and the closing is complete. The house will have a clear title. As long as you pay off this debt during the sale process, you can move out of the house with confidence.
Steps to Sell a House with a Home Equity Loan
Don’t stress if you are eager to sell your house but still have a substantial home equity loan to pay off. Follow these steps to understand whether listing your property is a good personal finance decision.
Review Your HELOC Agreement
The first step is to review your home equity loan terms to see if anything is preventing you from paying it off. Check for prepayment penalties which could cause you to accrue hefty fees if you pay off the loan sooner than your lender expects. The same goes for your home loan. Check to see if your mortgage lender will charge you for prepayment.
These fees don’t necessarily have to deter you from selling your house, but they should be factored into your closing costs. When in doubt, contact your home equity loan lender and ask about the viability of selling your home.
Determine the Payoff Amount
The main piece of information you want to get from your lender is the payoff amount, which is the cost to clear the lien on the property. During this time, you can also find out your remaining mortgage balance, which will affect your home sale proceeds.
You don’t need to be an expert in closing costs because your real estate agent will calculate them for you. However, knowing these two significant payoff numbers (your primary mortgage and home equity loan) can help you with rough estimates of your expected profits.
Hire a Real Estate Agent
The next step is to hire a real estate agent who can help you understand the value of your home and develop a plan to market your property. Your agent will conduct a comparative market analysis (CMA) to estimate the value of your home in the current housing market. This is not the guaranteed sale price. The final sale price might be lower than the initial listing price depending on the market and the offers you receive. However, the CMA can help you understand what your home is worth so you can confirm that you won’t be underwater at closing.
Try to find a real estate agent who has experience with home equity loans and HELOCs. They can run the numbers to confirm whether or not the sale will be profitable. Your Realtor should be able to provide rough estimates of the final closing costs as well, which will further help you calculate your profits.
Prepare Your House for Sale
If you and your real estate agent agree that selling your house with an existing home equity loan will be profitable, you can move forward with the listing process. This is just like any other home sale, where you will make repairs, invest in upgrades, and stage the house to attract potential buyers.
You may decide to pay for a pre-inspection to confirm the house is in good condition before listing it. This will alert you to any potential issues with the property. You can then make repairs so your buyers don’t have any issues moving forward with the home sale.
Home repairs and upgrades can be time-consuming and costly. Talk to your Realtor to determine which improvements are worth the effort or consider selling your house as-is.
Accept an Offer and Open Escrow
When a potential buyer is interested in your house, they will make an offer. If you choose to accept this offer, the buyer will put an earnest money deposit into an escrow account. The title company will hold on to this earnest money until the closing date.
At this stage, you will still be responsible for your home equity line of credit. However, the title company might contact your HELOC lender and alert them to the upcoming closing. This way, if the deal goes through on time, the title company can use the sale proceeds to quickly pay off your debt and clear the lien.
Use Sale Proceeds to Pay Off the HELOC
In most cases, the title company you work with will use the sale proceeds to cover any fees or costs you accrue. They will pay off your outstanding HELOC balance and any prepayment penalties. The title company will also pay off your mortgage loan and any fees that come with it.
Once all of these costs are covered, the title company will send you your net proceeds. They will give you closing documents explaining the breakdown of your expenses and how much you received from the sale.
Close the Sale
Once you are cleared to close, you can sign the closing documents. This process usually doesn’t take too long if the seller has time to review their closing documents before arriving at the closing appointment. After this appointment, the lien is cleared from the title and you are no longer the owner of the property.
Potential Complications When Selling with a HELOC
Selling your house with a home equity loan can be a straightforward process; however, you may encounter a few complications that make it harder to list your property.
Here are a few things that could affect your personal finance situation and your decision to move to a new property.
Depreciated Home Value
Most lenders will allow you to borrow up to 85% of your equity. If your home is worth $500,000 without a mortgage, you could borrow up to $425,000. However, the housing market is fickle, and your home values could drop. If your home sells for $420,000, you would be underwater on your loan.
Depreciating home values can prevent you from getting profits from your home sale, limiting your future down payment options for your next home.
Lender Fees
Your home equity loan isn’t the only cost you need to contend with. Many lenders charge application fees and other costs that make the loan more expensive. Your timeline to pay off your HELOC might be longer once you factor in your interest payments. This means it could take you longer to reach a point where you feel confident selling your house.
If you are still considering whether a home equity line of credit is right for you, shop around to different lenders. You might find one with lower interest payments that allow you to pay what you own faster.
Over-Extended Finances
A home equity loan can make it harder to decide to sell your home, but it can also put pressure on your finances. You might have higher monthly payments than you expect, preventing you from covering emergency costs or contributing to your nest egg.
Few people have enough savings to pay off the remaining balance on a loan before selling. However, you may want to keep making payments and potentially contribute any extra funds you have to the principal until you are no longer underwater when you sell.
Loss of Collateral
Selling your home means you lose that asset as collateral. It may be harder to borrow money or take out a personal loan without this property. Consider how the sale will affect this part of your life and evaluate your current credit limit. Some people are selling their homes if they can borrow money using their credit or other assets.
Potential Short Sales
A short sale occurs when the asking price is less than the seller owes on the property. For example, the listing price could be $400,000, but the seller has $450,000 in mortgages and HELOCs.
In most cases, the lender needs to approve the short sale. They will either forgive the loan or require the seller to pay off the debt. You could be left paying off a house you no longer own, which further strains your finances and limits where you can live until the debt is paid.
Hire a Trusted Realtor to Sell Your House With a HELOC
If you aren’t sure whether you should sell your home with a home equity loan or HELOC, contact a real estate professional.
An experienced Realtor can help you crunch the numbers and read through your HELOC agreement. They can alert you to any potential fees or problems that could affect the sale. A trusted partner can support you throughout the sales process until you complete the closing appointment.
To find an experienced agent, use FastExpert. You can find qualified Realtors in your area who are familiar with HELOCs. Interview multiple agents to help you get multiple points of view so you make the best possible choice for your finances. Try FastExpert today and work with a Realtor you can trust.
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