Selling A House with No Equity

Selling a house with no equity? Homeowners in this situation often face significant challenges, such as financial shortfalls during closing, the risk of being underwater on their mortgage, or the potential difficulty of selling their home.

Usually, those that are selling a house with no equity consider two main options: selling the house on their own or listing it with an agent. Selling independently can be intimidating if you’re not well-versed in the process, while listing with an agent might not always be ideal due to the high commission fees, which can range from 5% to 6%.

Fortunately, there’s another solution worth considering— selling to a “Cash buyer“.

Understanding Equity in Real Estate

If you financed your home purchase with a loan, your lender retains an interest in the property until the loan is fully repaid. Home equity is the difference between your home’s current value and the remaining loan balance.

For example, if you purchased a house for $200,000 and made a 15% down payment, you financed the remaining $170,000 through a lender. In this case, your equity would be 15%. Typically, anything less than 20% is considered low equity.

A loan from a bank for buying a home is commonly referred to as a mortgage. This mortgage specifies various terms, such as monthly payments, loan duration, and the interest rate. It’s important to remember that a mortgage includes not only the principal and interest but also taxes and insurance.

Usually, when you buy a home with a conventional loan and your down payment is less than 20%, lenders will require private mortgage insurance. This insurance protects the lender in case of borrower default.

What if I don’t have Equity on my Home?

Planning on selling a house with no equity? If you have no equity in your home, you might be wondering if you can still sell it. The good news is that selling a house with no equity is possible through a short sale.

A short sale is a viable option for homeowners who owe more on their property than its current value. With the mortgage lender’s approval, a homeowner can avoid foreclosure by selling the home for less than the outstanding loan balance.

Since neither the homeowner nor the lender will profit from this transaction, a short sale is typically considered only as a last resort. The bank must be convinced that it is the best way to minimize their losses. Additionally, the lender must agree to all the sale terms, making the process more time-consuming than a standard sale.

What happens after a short sale depends on whether the bank decides to forgive the remaining debt. For example, if you owe $400,000 and sell the home for $350,000, the lender might require you to pay the remaining $50,000, or they might choose to forgive it. If the debt is forgiven, the lender will report it to the IRS using a 1099-C form, and this $50,000 will be considered taxable income. Consulting an accountant is advisable to understand the tax implications of a short sale.

While a short sale can negatively impact your credit score, it is generally less damaging than foreclosure. Short sales usually result in a smaller credit score drop and are viewed more favorably because they demonstrate a proactive effort to avoid foreclosure, which can be crucial for future home buying.

How Much Equity Should You Have Before Selling?

Understanding the structure of your mortgage is important because your monthly payments don’t just reduce the principal balance—the actual amount you owe.

At the start, most of your payment goes toward interest, which is the cost you incur for borrowing the money.

Building equity in your home takes time, particularly in the early stages of your loan. During this period, a large portion of your payment goes to interest. It often takes several years for the majority of your monthly payment to start going toward reducing the principal balance instead.

The amount of equity you build is influenced by the progress of your loan term and the initial down payment you made. Knowing how much equity you’ve accumulated is essential when planning to sell your home, as you need to account for various fees associated with the sale.

What happens to the equity I have in my home after I sell it?

After selling your home, the proceeds will be used to pay off the remaining mortgage balance, any liens, and closing costs. Any remaining funds after these obligations are settled are yours to keep. If you close the sale through a title company, they will provide you with these funds via check or wire transfer.

Fortunately, this income is typically not taxable. If you owned and lived in the property for at least two of the five years before the sale, you can exclude up to $250,000 of your profit from taxes if you file individually, or up to $500,000 if you file jointly with a spouse. Even if you don’t meet these requirements, there may be special circumstances that could allow for a full or partial tax exemption, so it’s important to explore all options and consult with a tax professional before making any tax payments.

Exploring Your Options

Sell to a Cash Buyer

One of the most effective ways to sell a house with no equity is to sell to a cash buyer. Cash buyers are real estate investors who will purchase your property outright, regardless of its condition or equity situation.

When selling to a cash buyer, you can skip concerns about repairs, commissions, or closing costs. The transaction can be completed swiftly, often within a few days, with cash in hand.

For a quick and hassle-free sale of your home with no equity, consider contacting Illinois Real Estate Buyers. As a trusted cash buyer, we purchase houses in any condition and offer fair cash deals to homeowners in Illinois.

Consider a Short Sale

If your mortgage balance exceeds your home’s value, you might qualify for a short sale. A short sale occurs when the lender agrees to accept less than the mortgage balance to prevent foreclosure.

Although a short sale can be a viable option for homeowners with no equity, it can also be complex. You’ll need to collaborate closely with your lender, submit financial documents, and work with a real estate agent who specializes in short sales.

Renting Out Your Property

If you’re not looking to sell your property immediately, renting it out could be a viable option. Renting can generate extra income to help with mortgage payments and enable you to build equity over time.

Keep in mind, though, that being a landlord involves its own challenges, such as finding tenants, handling rental payments, and managing property maintenance.

Conclusion

Selling a house with no equity can be a challenging task, but it’s not impossible. By exploring your options, including selling to a cash buyer or considering a short sale, you can find the right solution for your needs.

If you’re planning on selling a house with no equity, consider reaching out to Illinois Real Estate Buyers. We buy properties in cash and in any condition. Send us a message for a no obligation cash offer today.