Are you seeking guidance on selling a house with minimal equity? For homeowners, dealing with low equity can be quite challenging. They find themselves in a bind, not wanting to face financial shortages during the closing process, the risk of being underwater on their mortgage, or the possibility of being unable to sell their home.
Typically, individuals in this situation explore two common options: attempting to sell the house independently or listing it on the market. The first choice can be daunting if you lack the necessary expertise, and the second option doesn’t always yield desirable results due to the substantial 5% – 6% commissions alone!
Fortunately, there’s another solution worth considering—a “subject-to” purchase agreement. This alternative could even result in you walking away with some extra cash. Continue reading to discover more about the available choices for selling your home with little or no equity.
What Exactly Is Home Equity?
If you financed your home purchase with a loan, your lender holds a stake in the property until the loan is fully repaid. Home equity refers to the difference between the current value of your home and the remaining balance on your loan.
For instance, let’s say you bought a house for $200,000 and made a down payment of 15%. In this case, the remaining $170,000 was financed through a conventional financial institution. Thus, your equity stands at 15%. Generally, anything below 20% is considered as having low equity.
A loan obtained from a bank for purchasing a home is commonly known as a mortgage. The mortgage outlines various loan terms, including monthly payments, loan duration, and interest rate. It’s crucial to understand that a mortgage comprises principal, interest, taxes, and insurance.
In most cases, when you buy a home with a conventional loan, most lenders will require you to obtain private mortgage insurance if your down payment is less than 20%. This serves as a safeguard for lenders to protect their interests in the event of borrower default.
How Much Equity Should You Have Before Selling?
Understanding how a mortgage is structured is valuable because your monthly mortgage payments don’t solely contribute to reducing the principal balance—the actual amount you owe.
Initially, the majority of your payment goes toward interest, which is the fee you pay to your lender for borrowing the loan.
Building equity in your home takes time, especially in the early stages of your loan payments. During this period, a significant portion of your mortgage payment is allocated to interest. It typically takes several years for the majority of your monthly payment to shift from primarily covering interest to mainly reducing the principal balance.
The progress of your loan term and the initial down payment you made significantly impact the amount of equity you accumulate. Knowing the level of home equity you’ve built becomes crucial when you’re planning to sell your home because you must consider various fees associated with the sale.
Options to Consider When Selling A House With Low Equity
When faced with selling a house with low equity, you’ll generally encounter a few common options to consider. Many individuals tend to gravitate towards selling with a real estate agent, while others choose the route of selling by owner. However, there exists a third viable option that is often overlooked, known as the “subject-to” approach. If you do not have enough equity for the first two options, the third option will give you a new perspective.
Option 1: Selling With A Real Estate Agent
When homeowners have low equity, it’s a common choice to consider listing their home with a realtor. Working with a real estate professional offers several advantages, including assistance in determining an appropriate listing price, negotiating with potential buyers, and handling the necessary paperwork.
However, it’s important to note that this option comes at a cost. On average, you can expect realtor commissions to range from 5% to 6% of the final sales price, which will be deducted from your net proceeds. Additionally, there are closing costs to consider, typically amounting to an additional 2% to 5% of the sales price.
Common Cost Factors When Selling A House:
If your home equity is significantly low, these fees can quickly diminish your net proceeds, potentially leaving you with no cash at all. In cases where your equity is close to or falls into negative territory, meaning you owe more on your mortgage than the current value of your house, you may find yourself in a situation where you need to bring money to the closing table in order to sell your house.
Alternatively, you might need to discuss the possibility of a short sale with your mortgage lender to determine if you qualify for such an arrangement.
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What Happens If You Sell A House With No Equity In It?
The ultimate goal when selling your house is to generate profit from the home’s sale. However, this may not always be the case, especially if you are selling a house with minimal or negative equity. In such situations, you might find yourself having to pay in order to sell your home. This arises when the selling price of the house is insufficient to cover the closing expenses. Typically, these fees are deducted from the proceeds of the home sale.
For instance, let’s say you are attempting to sell your house for $150,000, but you still have a mortgage balance of $140,000. In this scenario, you possess $10,000 of home equity. If you choose to sell through a realtor, you need to consider the associated commissions and closing costs.
It’s important to note that buyer concessions may also emerge during the negotiation process, resulting in additional expenses. Returning to the example, the closing costs and commissions for a $150,000 home sale can range from $12,000 to $15,000. After settling your underlying home loan, you might find yourself owing a few thousand dollars to cover the remaining balance. This is why having enough equity is crucial to the final outcome of the sale.
Option 2: Selling FSBO (For Sale By Owner)
Selling your home FSBO can be a favorable choice for several reasons. One notable advantage is that you won’t have to pay any commissions, which is particularly beneficial when dealing with low home equity. By avoiding these additional costs, you can retain more money from the sale and potentially eliminate the need to bring cash to the closing table.
However, it’s important to acknowledge that the FSBO route may entail a more time-consuming process. You’ll need to dedicate time to effectively market your home on platforms like Facebook and actively seek out potential buyers to minimize downtime between showings.
Essentially, you’ll be taking on the responsibilities typically handled by a real estate professional if you were to list your home on the open market. For some homeowners, this approach is an obvious choice, especially when they are focused on saving money and maximizing their financial gains.
A Few Tips To Sell Your House FSBO
To achieve effective results, it’s essential to have a well-thought-out plan in place. When selling a house with low equity, there are a few key factors to consider.
The initial step towards successfully selling your home is to determine its value.
2 Ways To Find The Value Of A Home:
1. Use a free online valuation tool
This task should be relatively straightforward. If you enter “how to determine my home’s value” into any search engine, you’re likely to find numerous free online tools specifically designed for real estate purposes.
Be sure to cross-reference your property amongst several sites to get a good feeling of your home’s value.
2. Get a comparative market analysis on your home
For the most precise valuation of your home, consider requesting a comparative market analysis or CMA from a local realtor.
Due to their access to extensive market data and sales information, realtors can provide valuable insights into market prices and property values in your vicinity.
It’s important to note that although you may be able to obtain a complimentary CMA, you might encounter a subtle sales pitch encouraging you to list your home with the agent.
Why Some Homeowners With Low Equity Pay To Sell
Now that you have determined the market value of your property, the next step is to establish the listing price while considering your remaining mortgage balance.
Subsequently, you can create a budget outlining the desired profit you aim to attain after selling the house. This includes paying off your lender, as well as any other loans and other debts or encumbrances associated with the property.
Once you adopt the perspective of a seller and officially list the property on the market, it is advisable to set the listing price slightly higher to allow room for negotiation with potential buyers. It is common to receive offers below the anticipated value. If you receive offers that do not have enough funds to sufficiently cover your outstanding obligations, less any expenses and fees, you may find yourself in a situation where you have to pay additional costs to sell your property.
Now, it’s time to focus on preparing your home for showings. This may entail conducting necessary repairs and updates to enhance its overall appeal. Once your home is in top shape, it’s time to kick-start your marketing efforts.
Following these steps, you’ll need to patiently wait for the ideal buyer to come forward, offering a price that covers your outstanding mortgage balance while allowing you to secure a profitable return on your investment.
Option 3: Selling Your House “Subject-To”
What exactly does “subject to” mean, and why should you consider this as a viable option when selling a property with low equity? This approach refers to the process of purchasing a property while taking over its existing mortgage.
In this scenario, the seller transfers the property’s title (deed) to the buyer without paying off the current mortgage (deed of trust). Instead, the buyer assumes the responsibility of making mortgage payments on behalf of the seller.
This solution proves beneficial when the seller possesses minimal or no equity, is facing an imminent foreclosure (thus requiring a quick sale to avoid foreclosure itself), or is determined to obtain a specific value for the home.
For the seller, this type of transaction offers several advantages. They can avoid the extended waiting period associated with traditional sales, potentially secure a value slightly above the retail price, contribute to building their credit through ongoing loan payments, and, last but not least, have the possibility of walking away with a lump sum of cash.
Is A “Subject-To” Transaction Legal?
In most residential transactions, you will typically encounter mortgage loans containing a due-on-sale clause. This clause grants the lender the option (but not the obligation) to accelerate the note and demand full repayment if the property is sold without the mortgage loan being fully settled. However, it’s important to note that “subject to” transactions themselves are not illegal. The due-on-sale clause serves as a means for lenders to safeguard their interests.
In the event that such a situation arises, there are methods available to address the matter, particularly when working with experienced home buyers like TX Cash Home Buyers. Collaborating with a reputable company can provide reassurance that your payments will be made promptly, and your transaction will be adequately protected.
What is a good amount of equity in a house?
A good amount of equity in a house typically depends on individual circumstances and financial goals. However, as a general guideline, having at least 20% equity is often considered favorable. This means that the homeowner owns 20% or more of the home’s value, while the remaining percentage is covered by the mortgage.
Does equity matter when selling a house?
Yes, equity does matter when selling a house. Equity represents the portion of the property’s value that you actually own, free of any outstanding mortgage or loan balances. When you sell a house, equity plays a significant role in determining your net proceeds from the sale. The higher your equity, the more money left that you can potentially walk away with after paying off any remaining mortgage, fees, and expenses associated with the transaction.
How much equity is enough to sell?
The amount of equity that is considered enough to sell a property varies depending on various factors, including personal circumstances, financial goals, and current market conditions. While there is no fixed threshold, having at least 15% to 20% of equity is generally advisable to ensure a smooth and financially beneficial sale.
About The Author
Lisa is a dedicated real estate professional specializing in assisting homeowners with burdensome houses and complex situations. Lisa and her team provide valuable guidance and solutions to homeowners navigating challenging real estate circumstances. Her commitment to delivering efficient and professional assistance makes her a trusted partner in helping homeowners find optimal resolutions for their property challenges.