Can you sell a home with a HELOC on it?

Question

To get started on our first real estate deal, my husband and I are planning on selling our current home which has a small mortgage on it (15% value of home), downsize so we have no mortgage, use some cash from the sale and borrow a HELOC on our new property (in which we'll have 100% equity) to fund our first deals. We have wanted to move to a different area for a year anyway and we're trying to be smart and get started in RE investing at the same time.

All this was moving along nicely and we even found a buyer for our home when the pandemic hit. I would estimate our house decreased in value about 10k recently. Now I'm wondering if we should stay put a little longer and borrow a HELOC on our current home and take advantage of the low interest rates and slightly lower property prices in our area (North GA). But we still want to sell when the market stabilizes again and our house goes back up in value (hopefully), so not sure if we should wait or not.

I've read mixed things on whether you can sell a house with a HELOC on it and if that's even an option. Does it depend on the lender? I would assume you could sell like normal and the mortgage and HELOC would come off the top at closing. Any advice or opinions on what you might do in our shoes would be much appreciated! Thanks!

Eric L. · Answer

@Dr. Jordan E Smith are you looking to purchase rentals? Have you considered applying for the HELOC on your current home and then renting it out until you are ready to sell? You can draw a down payment from your HELOC for your next home (primary or investment properties).Also, if your home is now worth $10K less, could you purchase your next primary home at a discount?

Jacob Sampson · Answer

Of course you can. You just have to be able to pay the HELOC off at time of sale. The HELOC is associated with the asset so once the asset is sold the HELOC is paid off and goes away.

Dr. Jordan E Smith · Answer

@Jeremy Z.Great points. We still have a buyer - someone we know actually - who is willing to pay us original value of the home once she closes on her current primary residence. It's looking like we will also be able to get a discount on our new smaller primary home because we will be able to buy with cash. THEN we can HELOC that new place and finally get our first rental property under way this year. It has seemed like something keeps getting in the way but I'm determined to become a real estate investor this year hell or high water! lol Thanks for your input!

Dr. Jordan E Smith · Answer

@Eric L.You make a good point and we are actually not looking to move far away from where we are now so the market is fairly similar as far as price fluctuations go. We considered using a heloc for downpayment on a new place but really do not want to have a mortgage moving forward to help lower our monthly expenses and help us get financially independent a little sooner. The other issue is the house we are in now is large and away from the major metropolitan area and would make for a better vacation rental. That market has taken a huge hit recently in my understanding but VRBOing it once this all passes isn't a terrible idea if we can't get top dollar selling it. Thanks for your input!

Jeremy Z. · Answer

@Dr. Jordan E Smith @Eric Lui touched on an important point with his last question. If homes in the area you are looking to move to have also decreased by roughly 10% then it would essentially be a wash. Furthermore, if you wait for your home to stabilize, the market you are looking to move to may have stabilized too. You really need to evaluate both markets, but if both markets have had similar impacts I wouldn't hesitate to move forward with your plan if that is your preferred course of action.The current market is a bit interesting in that some people think we are in for a long recession while others believe we will bounce back from this rather quickly after this virus subsides. In my opinion that has led to quite a bit of variance in the pricing of new listings hitting the market. Just be careful not to take a steep discount on your current house and then pay close to top dollar for your next place.Regarding your HELOC, as others have already stated, your outstanding balance would just be settled with the sale proceeds at closing.

Dr. Jordan E Smith · Answer

@Chris DeMello Thanks so much sharing your experience and advice! I have been leaning that way but it's nice to hear cases where it worked out well for the seller. And I agree, 1st position HELOC not second mortgage. Especially since cash flow is our major goal going into this. Thanks for the response!

Jacob Sampson · Answer

Chris DeMello · Answer

Hey Dr Jordan, I sold my home in Hawaii last year that was on a 1st position HELOC. Same as if it was a mortgage. I didn't use a realtor to sell and just worked with escrow. They paid off my HELOC balance and paid us the rest. Personally I'd take advantage of the great rates and get a 1st position HELOC instead of a 2nd. It'll increase your cash flow by paying off your remaining mortgage.

Dr. Jordan E Smith · Answer

@Jacob Sampson Thank you for your response. Do you find this true across the board for all mortgage companies ? Ours is with Mr. Cooper..