What Happens When You Sell Your House With a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving credit line where your home serves as collateral. It allows homeowners to borrow against their home’s equity, providing access to funds up to a specified limit. When selling a home with an active HELOC, understanding the financial and procedural implications is important.

The HELOC as a Secured Lien

A HELOC is a secured debt, directly tied to the property. It places a lien on your home, giving the lender a legal claim. This lien remains active until the debt is fully satisfied, ensuring the lender’s interest in the asset.

While a HELOC typically ranks as a junior lien, its existence necessitates resolution during a sale. For a clear title to be transferred, all liens, including the HELOC, must be addressed and cleared. This ensures the buyer receives the property free from encumbrances.

Settling the HELOC at Closing

When a home with a HELOC is sold, the outstanding balance must be paid off at closing. The title company or escrow agent obtains a payoff statement from the HELOC lender. This statement details the exact amount required to settle the debt, including any outstanding principal and accrued interest up to the closing date.

Funds for the HELOC payoff are usually disbursed directly from the sale proceeds. The title company deducts this payoff amount from the money the buyer pays for the home before distributing any remaining funds to the seller. Once the HELOC is paid in full, the lender formally releases the lien on the property. This action legally removes their claim, allowing for the transfer of clear title to the new homeowner.

Calculating Net Sale Proceeds

The presence of a HELOC directly influences the net proceeds a seller receives from a home sale. Net proceeds represent the actual cash a homeowner receives after all associated costs and debts are settled. To determine this amount, the HELOC payoff is subtracted from the gross sale price, along with other selling expenses.

To calculate net proceeds, deduct the primary mortgage payoff, the HELOC payoff, real estate commissions, and other closing costs from the home’s sale price. For example, if a home sells for $400,000, with a $200,000 primary mortgage, a $40,000 HELOC balance, $24,000 in real estate commissions (6%), and $8,000 in other closing costs, the net proceeds would be $128,000.

Addressing Specific Sale Scenarios

If sale proceeds are insufficient to cover both the primary mortgage and the HELOC, the seller faces a shortfall. In such cases, the seller would need to bring personal funds to the closing to cover the deficit.

Alternatively, a short sale might be considered. This involves negotiating with lenders to sell the property for less than the total outstanding mortgage and HELOC balances. Lender approval is required, as they agree to release their liens for a reduced amount.

Even if a HELOC has a zero or very low balance, it still constitutes a lien on the property. It must be formally closed and released during the sale process to ensure a clear title transfer. The procedural steps for obtaining a payoff statement and lien release remain necessary, though the financial impact on the seller’s proceeds would be minimal.