So you took out a home equity line of credit (HELOC) to finance a large purchase and are now thinking about selling your home. You may be wondering: Can I sell my home if I have a HELOC? Fortunately, you can sell your house even if you have a HELOC attached to the property — but it’s not always a simple process. Here are some things to consider while weighing your decision to sell a property with a home equity loan.
What is home equity?
One of the key advantages of owning a home over renting is the ability to build equity. Your equity is the difference between what you owe on the home and what it’s worth. For example, let’s say your home’s current market value is $300k, and you have a $150k mortgage loan. In this case, your home equity is $150k ($300k – $150k = $150k.)
Generally, people only get to access their home equity when they sell their homes and collect the proceeds. However, some people decide to take a loan secured by their home’s equity, such as a HELOC.
What is a HELOC?
A home equity line of credit (HELOC) allows you to borrow against the equity in your home. With a HELOC, your house is collateral for the loan, which is why staying on top of your payments is crucial (or you could risk losing your home).
When you apply for a HELOC, lenders will typically look at your credit score, your home’s current market value, and the amount of equity you have. If your credit needs some work or you haven’t accrued enough equity, lenders may be hesitant to approve you for a loan. If you receive a HELOC, you gain access to a low-interest credit line with flexible purchase and repayment options.
Homeowners take out home equity loans for various reasons. Common purchases one may make with a HELOC include:
- Home repairs/renovations
- Children’s college education
- Buying a second property
- Debt consolidation
- Finance other large purchases
HELOC’s are a convenient funding option for expenses you wouldn’t be able to afford with cash. However, there are drawbacks, such as the risk of losing your home if you default on your loan. This is why taking out a HELOC is a serious decision you should only consider if you can easily afford the payments.
Can you sell a house with a HELOC?
So, can you sell with a home equity loan? Generally, the answer is yes. Lenders don’t care how you repay your HELOC loan as long as it gets repaid. The most common way to pay off a HELOC is from the money you receive from the sale of your home.
Many homeowners worry that they have to pay off their HELOC before listing their house. Fortunately, you can go ahead and start the selling process with an open HELOC. As long as you repay the loan by closing, there shouldn’t be any delays. Paying off your home equity loan from the sale proceeds is the easiest and fastest option — so if you’re in a rush to sell, this might be the best option for you.
What if you don’t have enough equity to pay off a HELOC?
Selling a home with a HELOC is generally a smooth process — however, things get tricky if you owe more than your house is worth, also known as being “underwater.” For example, if you owe $200,000 on your current mortgage and have a $20,000 balance on a HELOC, you would need to sell your home for at least $220,000 to be able to repay your debts.
If the sale price of your home won’t cover your debt obligations, you will need to find an alternative way to repay the loan or finance the difference. In this case, you may want to consider delaying selling your home until your equity increases, or you find another way to pay off the equity loan.
Negotiate with your lender
If you don’t have sufficient equity to pay off your HELOC from the sale proceeds, you should contact your lender immediately. In some cases, your lender might agree to settle your balance for less than you owe — known as a “short sale.”
Convert to an unsecured line of credit
Another way to secure funding to repay your HELOC is to ask your bank if they will convert it to an unsecured line of credit. Be aware that many lenders are hesitant to do this because it’s riskier for them — since your property will no longer secure the loan. However, your approval odds increase if you have good credit and a relatively low balance on your HELOC.
Keep in mind that this option will likely result in a higher interest rate and monthly payment — which is why you may want to consider other options first.
Take out a personal loan
If you have good credit, you may be able to take out an unsecured personal loan to pay off your HELOC. Just be sure to shop around to try and find and compare loans with a reasonable interest rate and favorable terms.
Use personal assets to pay off the loan
If you’re unable to pay off your HELOC through other funding sources, you may have to consider using your savings or assets. For example, maybe you have a boat or vehicle you can sell to come up with the cash. You can also consider borrowing against your retirement account, such as your 401(K) — but this should be a last resort.
The bottom line
If you want to sell your home but are concerned about your HELOC, know that options are available. However, the process does get more challenging if you don’t have enough equity accrued to settle your HELOC out of the sale proceeds. In that case, you may want to delay selling or find another way to pay off the loan.
Want to sell your house fast for cash?
If you need to sell your house fast, consider selling to us! We offer fair cash prices to homeowners across the state of Massachusetts. Best of all, we buy your home in any condition, so there’s no need to worry about costly repair work.