Can You Sell a House With a Home Equity Loan?

A home equity loan (HEL) or a home equity line of credit (HELOC) allows homeowners to borrow against the equity they have built in their property. These financial tools act as a second mortgage, creating an additional claim or lien on the home. Selling a house with a home equity loan is a viable option, but it introduces specific financial considerations and procedural steps that must be addressed during the transaction.

Understanding Your Home Equity Loan

A home equity loan is a debt instrument that allows property owners to leverage the accumulated value in their home. It functions as a second mortgage, meaning it is subordinate to the primary mortgage on the property. The loan amount is determined by the difference between the home’s current market value and the outstanding balance of the primary mortgage, representing the homeowner’s equity. For instance, if a home is valued at $400,000 and the primary mortgage balance is $250,000, the homeowner has $150,000 in equity available.

Home equity loans provide a lump sum of money upfront, typically with a fixed interest rate and a set repayment schedule, similar to a traditional mortgage. In contrast, a home equity line of credit (HELOC) offers a revolving line of credit, allowing borrowers to draw funds as needed up to a predetermined limit during a “draw period.” During the draw period, payments may be interest-only, with principal repayment beginning in a subsequent “repayment period.” HELOCs typically feature variable interest rates, meaning monthly payments can fluctuate.

Both HELs and HELOCs secure the loan using the home as collateral, establishing a legal claim, known as a lien, against the property. This lien means the lender has a right to the property if the borrower defaults on payments. Because the home serves as collateral, the loan represents a claim against the property that must be satisfied when ownership transfers. The lien remains in place until the debt is fully repaid, ensuring the lender’s interest is protected during a sale.

Financial Implications of Selling with a Home Equity Loan

When selling a home with an existing home equity loan or HELOC, the outstanding balance of this loan, similar to the primary mortgage, must be paid off at the time of closing. The sale proceeds are typically used to clear all existing liens on the property before any remaining funds are disbursed to the seller. To facilitate this, the homeowner will need to obtain a payoff statement from their home equity lender, which details the exact amount required to satisfy the loan on a specific closing date. This statement includes the principal balance, accrued interest, and any applicable fees.

Sufficient Equity

In a scenario with sufficient equity, the sale price adequately covers both the primary mortgage and the home equity loan balances, along with all associated closing costs. For example, if a home sells for $450,000, and the combined payoff for the primary mortgage and home equity loan is $350,000, the seller would receive the net proceeds after deducting closing costs, such as real estate commissions, title fees, and transfer taxes.

Insufficient Equity

Conversely, situations of insufficient equity arise when the sale price is not enough to cover the total amount owed on both the primary mortgage and the home equity loan. This means the homeowner is “underwater” on their property. In such cases, the seller may need to bring additional funds to the closing table to cover the deficit and satisfy all outstanding liens. For instance, if the sale price is $300,000, but the combined loan balances and closing costs amount to $330,000, the seller would owe $30,000 at closing.

An alternative for homeowners facing insufficient equity is a short sale. A short sale occurs when the lender agrees to accept a sale price that is less than the total amount owed on the mortgage. This process involves negotiation with the lender, who must approve the sale. While a short sale can help a homeowner avoid foreclosure, it often negatively impacts their credit history. The decision to pursue a short sale usually involves consultation with real estate professionals and legal counsel.

Steps to Selling a Home with a Home Equity Loan

Selling a home with a home equity loan or HELOC involves several practical steps to ensure a smooth transaction. One initial preparation is to request an accurate payoff statement for both the home equity loan and the primary mortgage. This statement provides the precise amount required to fully satisfy the loan on the anticipated closing date, including any per diem interest that accrues. Obtaining this early helps in understanding financial obligations.

Professional Assistance

Throughout the selling process, various professionals play roles. A real estate agent assists in marketing the property, negotiating offers, and coordinating with potential buyers. A real estate attorney, if retained, provides legal guidance and reviews all transaction documents. The title company or closing agent is responsible for coordinating the payoff of all liens at closing, acting as a neutral third party to ensure funds are correctly disbursed and a clear title is transferred to the buyer.

Closing Process

The closing process is where the home equity loan payoff is executed. At the closing table, the title company or closing agent receives the sale proceeds. They then disburse funds directly to the home equity lender, as well as the primary mortgage lender, to clear all outstanding debt secured by the property. This direct payment mechanism ensures that the liens are removed from the property’s title, allowing the new owner to take possession without encumbrances.

Reviewing the Closing Disclosure

Before finalizing the sale, the seller will receive a document called the Closing Disclosure (CD). This document, typically provided at least three business days before closing, outlines all the financial details of the transaction. It itemizes the sale price, closing costs, loan payoffs, and the net proceeds due to the seller. The seller should review the Closing Disclosure to verify that the home equity loan payoff is correctly listed and that all figures align with their expectations and the payoff statement obtained earlier. Any discrepancies should be addressed with the title company or closing agent immediately to prevent issues at closing.