What to Do With Loans When Selling a House for Cash Quickly?

In the first two quarters of 2024, almost 671,000 new Home Equity Lines of Credit (HELOCs) totaling around 105 billion originated from lenders, according to Core Logic. Increasingly, Americans are tapping into their home equity using HELOCs and other home loan strategies to pay large expenses or other bills.

If you are planning to sell a house, then if loans are involved, this complicates the process even further. That’s where selling a home for cash can be an attractive option since it expedites the process greatly.

In this article, we’ll explore what to do with loans when selling a house and other home sale strategies.

1. Understanding Your Loan Obligations

When selling a house, any outstanding loans tied to the property must be resolved before or during the transaction. These typically include:

Primary Mortgage: The main loan secured by your property
Second Mortgage or HELOC: Additional loans or lines of credit using the home as collateral
Judgments or Liens: Legal claims against the property that must be satisfied

Failing to address these obligations can delay or derail a sale. To avoid complications when you wish to sell your home fast, start by understanding your current financial situation:

Check Your Loan Balances

Contact your mortgage lender or loan servicer to obtain the payoff amount. This figure includes the remaining loan balance, accrued interest, and any applicable fees.

Don’t worry if this figure seems high since a lot of your home sale profits should cover this amount.

Identify Additional Liens or Claims

Request a title search to uncover any liens or judgments on the property. Common examples include unpaid property taxes, contractor liens, or divorce-related settlements.

Selling with liens can be extra complicated and sometimes impossible, that’s where you need to consider cash home buyers since they will come to your rescue without worrying too much about the lien on your home.

2. Sell My House Fast – With an Existing Mortgage

Most homeowners sell their properties before fully repaying their mortgages. Here’s how this works in a cash sale.

The Role of the Title Company or Closing Agent

When selling a house for cash, the buyer typically works with a title company or closing agent. These professionals ensure that the transaction is legally sound and manage loan payoffs on your behalf.

Paying Off the Mortgage

The proceeds from the cash sale are used to pay off your existing mortgage. The title company coordinates this process, sending the payoff amount to your lender.

For example:

Your home sells for $300,000 in a cash transaction
Your outstanding mortgage balance is $200,000
The title company deducts $200,000 from the proceeds
It then pays your lender, leaving you with $100,000 (minus closing costs and other fees)

Obtaining a Mortgage Payoff Statement

Before closing, request a payoff statement from your lender. This document specifies the exact amount needed to satisfy the loan, including interest up to the anticipated closing date.

3. Handling a Second Mortgage or HELOC

If you have additional loans, such as a second mortgage or HELOC, these must also be resolved during the sale. Here’s how to manage them.

Notify All Lenders

Inform your second mortgage or HELOC lender about your intent to sell the property. Like your primary lender, they’ll provide a payoff statement.

Coordinate Payoffs

The title company or closing agent will ensure that both loans are paid off at closing. The process may involve splitting the sale proceeds between the two lenders, depending on the outstanding balances.

Negative Equity Considerations

If your home’s sale price is insufficient to cover all loans, you may need to negotiate with lenders. This process, known as a short sale, involves obtaining lender approval to sell the property for less than the total debt owed.

4. What If There Are Liens or Judgments?

Liens or judgments against your property can complicate a quick cash sale. Here’s what you need to know.

Identifying Liens Early

Conduct a title search early in the process to identify any liens. Common types include:

Tax Liens: Unpaid property or income taxes
Mechanic’s Liens: Claims from contractors for unpaid work
Judgments: Legal claims resulting from lawsuits or debts

Clearing Liens Before Closing

Liens must be cleared before transferring ownership to the buyer. This typically involves paying the lienholder directly from the sale proceeds.

Negotiating Lien Settlements

If the lien amount exceeds your available equity, consider negotiating a settlement with the lienholder. This can sometimes result in a reduced payoff amount.

5. Benefits of a Cash Sale for Sellers With Loans

Selling a house for cash offers several advantages for homeowners navigating loan obligations. You might not have considered this option before, but it can be a viable path for those with loans on their home and who wish to consider alternate home sale strategies.

Speed

Cash transactions close faster than traditional sales, often within 7-14 days. This can be particularly beneficial for sellers facing financial difficulties or tight deadlines.

Reduced Contingencies

Cash buyers often waive appraisal or real estate financing contingencies. This minimizes the risk of delays.

Simplicity

The streamlined process makes it easier to resolve loans and liens quickly. If this is a concern of yours, then speak to a cash home buyer today.

6. Potential Challenges in a Cash Sale

While cash sales offer many benefits, there are challenges to consider. These shouldn’t be a hindrance if you speak to the right cash buyer who’s reputable and reliable.

Lower Sale Price

Cash buyers, particularly investors, may offer less than market value. Sellers must weigh the trade-off between speed and maximizing profits.

Negotiating Loan Payoffs

If your loan balances exceed the sale price, you may need to negotiate with lenders to avoid foreclosure or financial loss. This is an important step and cannot be skipped.

Verification of Buyer’s Funds

Ensure the cash buyer has sufficient funds to complete the transaction. Request proof of funds early in the process to avoid last-minute complications.

7. Steps to Sell a House for Cash With Loans

If you have never sold a house with loans, then you will have a steep learning curve to navigate. To ensure a smooth transaction, follow these steps.

Step 1: Assess Your Loan Situation

Obtain payoff statements for all outstanding loans and conduct a title search to identify liens or judgments. You should have this knowledge about your mortgage and loans in any case, whether you decide to sell your home or not.

Step 2: Choose the Right Buyer

Work with a reputable cash buyer, such as a real estate investor or home-buying company, to avoid scams. Research their track record and request references if necessary.

Check online reviews to see what past home sellers have to say about the cash home buyer.

Step 3: Negotiate the Sale Price

Understand the market value of your home and be prepared to negotiate with the buyer. Keep in mind that cash buyers may offer less but provide faster closing times.

You need to decide what’s more important to you – cash in your hand right now or going through a lengthy process with the traditional home-selling path.

Step 4: Coordinate With a Title Company

Engage a trusted title company or closing agent to handle the transaction. They’ll ensure that loans are paid off, liens are resolved, and ownership is transferred legally.

Step 5: Review Closing Documents

Carefully review the closing statement to confirm that loan payoffs and other fees are accurately accounted for. You need to read through the documents properly to ensure you know what you are signing off.

If you aren’t good with legal documents, then find someone who is, and go along with them to the closing.

Step 6: Plan for Remaining Debt

If the sale proceeds are insufficient to cover your loans, work with your lenders to resolve the remaining balance. Options include negotiating a payment plan or pursuing a short sale.

You could even try borrowing from friends and family, if possible.

8. Special Considerations for Sellers in Financial Distress

For homeowners facing foreclosure or financial hardship, selling for cash can provide a lifeline. However, it’s important to approach them carefully.

Seek Professional Advice

Consult a real estate attorney or financial advisor to understand your options and protect your interests. It’s important to have someone who understands legalese and can help you with signing off legal documents on your side.

Communicate With Lenders

Inform your lenders of your intent to sell and explore alternatives such as loan modifications or deed-in-lieu agreements. Always keep everyone in the loop so you know exactly what you are getting into.

Be Cautious of Scams

Avoid buyers who pressure you into signing contracts without full transparency. Never sign with someone who seems coercive or too pushy.