You do not need equity to sell your house. However, having at least 10% equity ensures you do not sell the house at a loss. It will cover your selling and closing costs ensuring that you break even at the bare minimum.
The more equity you have when selling the house, the more profitable the real estate transaction. The net proceeds are sufficient to pay for your selling and buying costs for a new home, and you may have some more money left.
In most cases, the longer you have had the house, the higher its equity. However, there may have been a surge in the growth of the real estate market in your area leading to a quick gain in equity in your house. In this case, you do not have to wait too long to sell the house as-is.
Your home equity is the market value of the house minus outstanding mortgage and any other debt owed on the house. Typically, mortgage loans have an interest rate on the principal amount.
In the initial years of paying off your mortgage, the repayments go towards interest payments and private mortgage insurance.
Therefore, there is minimal growth in the equity of the house. As the mortgage matures, you build equity in the house. If you do not have a mortgage balance or debt on the house, your equity is the entire home value.
The down payment goes towards the principal. Therefore, the more you pay in down payment at the time of purchase, the higher your home equity.
You will gain equity faster if you opt for a 15-year mortgage compared to a 30-year mortgage. Or if you make higher mortgage payments and request your lender for the extra amount to go towards the principal.
Doing so also reduces the total interest on a fixed-rate loan. A shorter mortgage period and higher repayments only make sense if you can afford them. Otherwise, you risk defaulting, leading to a foreclosure.
If you have already bought your house, you have limited control over how fast the market grows. The only thing you can do is to time your sale around seasons of the year when the market is performing well. Or leverage on a seller’s market if it arises.
However, if you want to buy, you can research to identify an area with high growth potential. Some pointers include steady economic growth in the area, a low crime rate, a location close to the city or main social amenities, and a high margin between listing prices and final selling prices.
Some renovations can significantly improve your house’s appraisal value, enabling you to set a higher home price. However, you must be careful as not all renovations have a significant ROI.
Renovations that involve modernizing the home or increasing the square footage have the highest return on investment. For example, replacing old entry doors, upgrading the kitchen design, or completing the basement.
If you find yourself in a position where you must sell the house despite having no or minimal equity, below are your options.
You can sell a house with little or no equity through the traditional sale process. Either hire a real estate agent to oversee the real estate transaction or sell it yourself. There are pros and cons to each approach.
With a real estate agent, you will need to pay a commission, but they take up all the crucial aspects of the sale.
Research by the National Association of Realtors shows that houses sold through a real estate agent can fetch a higher sale price than for sale by the owner (FSBO).
On the other hand, with an FSBO, you save on the real estate agent commission, but you may not be skilled and well-informed to position the house and sell it at a higher price.
FSBO is best suited if you have a buyer already, e.g., a friend, colleague, family member, or a cash buyer. That way, you do not have to stage, list, or market the house.
With both options, the proceeds are first used to pay the mortgage balance and any other outstanding debt on the house. You will have to pay for selling and closing costs out of pocket.
You can sell your house for cash and selling to a cash buyer is a fast and convenient way to sell a house with low or no equity. It is suitable whether you sell the house due to foreclosure, damage, tax issues, or lien.
Once you reach out to the cash buyer, they will visit the house as-is to assess it and give you a cash offer. The cash buyer may offer to cover the closing costs. Since you do not need to hire a listing agent, you save up on real estate commission, which usually is the largest cost in a real estate transaction.
The process is quicker as you do not have to market, list, and stage the house. The main disadvantage of selling to a cash buyer is that they offer a lower price than your listing price.
If you are struggling to keep up with your mortgage payments and the value of the house is much lower than the amount owed (negative equity), you can request the lender to put the house on a short sale to avoid foreclosure.
Neither the homeowner nor the lender will make a profit on the sale. Therefore, the mortgage lender will assess whether a short sale is the best option to mitigate further loss.
You may still be required to pay any outstanding debt, or they may forgive it. Even if they forgive the loan balance, the IRS will still consider it taxable.
Note that selling a house through a short sale affects your credit score negatively, but it is a better option than foreclosure or filing for bankruptcy.
You can sell a house with no or minimal equity. However, you will have to pay closing costs and any outstanding debt owed on the house out of pocket.
Therefore, unless it is inevitable, it is always best to wait for the equity to increase before selling the house.
You will need at least 10-15% equity to break even and for the closing cost to pay for themselves.
There are various ways you can leverage higher equity. For example, you can upsize, buy new properties, get a second mortgage, or invest in other projects.
Seniors can get a reverse mortgage on their equity. They borrow money to serve as income against the house’s equity as security. You can also comfortably downsize and save the excess amount.
In the case where you must sell despite the low or minimal equity, selling to a cash buyer is a good idea. The sale process is quick and convenient.
Minimal processes are involved, and you save up on some of the most significant selling costs, such as repairs, staging, listing, marketing, and real estate agent commission.
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