selling your house without paying any money out of pocket

Step-by-step guide for selling your house within 1 year of purchase

Whether you’re facing a complete change in circumstances, got a lousy deal or simply feeling buyer’s remorse, selling your house within a year of closing can pin you between a rock and a hard place. Even so, there are strategies you can use to walk away debt-free and without paying any money out-of-pocket.

If you need to sell your house within a year of purchase, you can do so by employing one of the following strategies; loan assumption,
subject to sale, short sale, or a deed-in-lieu. Keep in mind, however, that some of those selling strategies — short sales and a deed-in-lieu — Will get you out of the mortgage, but will also hurt your credit score in the process.

Not to mention that you would be at the mercy of the mortgage lender as you need their approval to move forward with either strategy. On the other hand, if you want to sell the house while protecting your credit, selling it through a loan assumption or a subject to is the way to go.

Don’t treat it as a typical sale

The process of selling a house with very low equity is different from your traditional transaction. In this case, since you’re selling within a year of purchase, your seller closing costs of around 8-10% will most definitely put you in the red.

For instance, if you owe $100,000 and manage to sell the house for $95,000, you will not only be in the red for $5,000, but you will also owe around $8,000 (8%) more in closing costs. You’ll be left without a house and still have to pay $13,000, out-of-pocket, to sell the darn thing.

You want to sell the house, but the numbers don’t add up. In all honesty, why should they? The lender took a risk on you, and by baking out early, you’re merely an investment that went belly-up. It sounds harsh, as the truth tends to do, but the proof is in the pudding, i.e., the adverse effects a short sale or a deed-in-lieu will have on your credit report.

At this point, your job should be to mitigate your losses as much as possible. You need to find a creative solution that not only gets you out but also protects your credit in the process.

What do you want out of the sale? (hint: it’s all about the equity)

By now you should recognize that the profit from selling a house comes from the difference between the sales price and what you owe on the mortgage. Now, if you are selling your house within a year of closing, how much progress have you made on the mortgage? The odds are that you have made very little progress and thus, your profit will be minimal at best.

What does this mean for you?

It means that you need to be realistic! Many homeowners will try to list the house for more than what it’s worth to make up for the lack of equity. Although it may sound like a good idea, this is one of the worst things you can do because few people will buy a house above its market value.

All you need to do is visit, and you’ll find houses that are priced incorrectly and thus, sit on the market for hundreds of days. Although you may only be increasing the price to break even, that slight increase can add months to the DOM (days on market) of the house. Besides, a savvy buyer will run an appraisal and instantly figure out that the house is overpriced.

As mentioned above, your goal should be to mitigate your losses. Aim to break even and only then can you attempt to make a profit. Being realistic and understanding your situation is the key to getting out smoothly and moving on with your life.

Can a traditional sale work for you?

Now we move on to the meat and potatoes; is selling the traditional way a right fit for your situation? The answer depends on a few factors including, but not limited to:

  1. How much equity you own
  2. The time you have to sell the house
  3. The condition of the house
  4. The type of mortgage
  5. Can your equity cover closing expenses

1. Calculate your equity

Understanding how to calculate your equity will determine if selling the traditional way is right for you. Now that we’re on the subject of equity, estimating it is relatively straightforward. To figure out your owned equity, all you need to do is subtract what you currently owe from what you paid for the house.

Example #1: If you bought a house for $100,000 with a down payment of $10,000 (10%), your mortgage now sits at $90,000. In this case, your owned equity is calculated by subtracting $95,000 from $100,000 with the answer, $10,000, as your equity.

If you are unsure of the exact amount that you owe, contact your lender, to get that information. When you call, have the following info on hand:

  • Your full name
  • Loan or account number
  • Last four SSN
  • Your address

Now that you’ve calculated your equity, you can determine if selling the house through a real estate agent is in your best interest. Yourequity must cover all of the 8-10% in closing costs for you to avoid paying anything out-of-pocket. If the available equity manages to cover the expenses, then start searching for a local Realtor that can work with you.

In contrast, if the equity does not cover your closing costs, then selling through another strategy such as a short sale or loan assumption should be your top priority.

2. Wait for the perfect offer

Even if you have the available equity to sell through an agent, the entire process, on average, takes around 68 days. Some homeowners don’t have the time to sit around waiting for the perfect offer to come along.

3. Are you leaving the house just like you found it?

Since you’ve only been living in the house for a year or less, its condition should not be an issue. If you did any work, however, it could bring down the value of the property if it was done incorrectly or without a permit. As a rule of thumb, restrain from major projects during your first few years of owning the house.

4. The type of mortgage can greatly affect equity

An FHA mortgage typically requires only 3.5% down whereas a conventional mortgage needs a minimum of 10% down. So in this case, you would have a better chance of walking away with a profit if your mortgage is a conventional one. Also, a VA or USDA rural housing loan requires no down payment and, in some instances, can cause the homeowner to go underwater on the mortgage.

5. Can the available equity cover the closing costs?

Once you calculate your equity, you need to figure out if it’s enough to cover the closing expenses. Determining this is done by subtracting 8-10% of the expected sales price from your equity.

That answer will be the determining factor of whether or not you should move forward with a traditional sale. To put it briefly, if your equity covers all closing expenses, sell through a real estate agent. On the other hand, if the equity cannot cover the closing, another selling strategy should be employed.

Contact your lender

If you determined that a traditional sale will cost you money out-of-pocket, your next option would be to work with your lender. As a result, they may propose a short sale or a deed-in-lieu for your situation.

Incidentally, both of those strategies negatively impact your credit score. If you do not care about your credit, however, these strategies can get you out. Not quickly, but they’ll get you there nonetheless.

Short sale

Short sales are some of the most complicated transactions in real estate. Even so, their definition is quite simple; sell a house for less than what is owed on the mortgage.

If you’re thinking of selling your house within a year of purchase, this strategy can work for you. There is, however, a ton of small-print that needs to be addressed when attempting a short sale.

For one, short sales are usually reserved for homeowner attempting to avoid foreclosure. They also require approval from the lender and a real estate agent needs to be attached to the transaction.

Not to mention that short sales take, from start to finish, takes aroud 120 days. If you’d like to read up on the impact a short sale has on your credit, this article from Experian, a major credit bureau, sums it up rather nicely.

deed-in-lieu: return the house to the lender.

In this case, a deed-in-lieu is one step behind a full-blown foreclosure. It’s so rare in fact that a lender will not consider a deed-in-lieu unless a short sale has been attempted and failed. Giving the house back to the lender will also wreak havoc on your credit report.

As opposed to a short sale, a deed-in-lieu, if approved, is completed in around two months. More importantly, by giving the house back to the lender, you will forfeit any equity you own on the house. This strategy is marginally better to foreclosure and should be avoided unless nessesary.

The lender could eventually come after you with a deficiency of judgment if the house sells for less than what you owe on the mortgage. To avoid this, it is in your best interest to contact an attorney specializing in real estate law that can help you through the process.

The hardest problems often require the most creative solutions.

Imagine your situation as being in line at the DMV while you need to use the restroom. What do you do? You don’t want to leave because you might lose your spot and have to start at the back of the line.

So you ask your friend, who is sitting in the waiting area, to get up and take your spot while you take care of business. In this scenario, your friend assumed your position in line and thus, you avoided the adverse effects of leaving before your turn.

Loan assumption

Being able to “pass” your mortgage, along with its terms, is the basic definition of a loan assumption. It allows you to walk away no matter how long you’ve been in the house or the amount of equity that you own.

If you can find yourself a buyer who wants the house, along with its terms, then this is your one of your best options. A by-the-book assumption will ultimately free you from the mortgage and protect your credit in the process.

Cons of a loan assumption

Although it sounds like a perfect solution, loan assumptions are rare because lenders often include “due on sale clauses.” These clauses require full payment of the loan before the title transfers from one individual to another.

Due on sale clauses, in turn, render loan assumptions obsolete. If you’re not sure if your loan has a due on sale clause, a short call to your lender is all you need to get the information.

Even if you can pass the mortgage to someone else, the lender will often require your buyer to go through the regular loan application process. There’s also a fair amount of necessary paperwork and assistance from a real estate attorney, or a Realtor is a must.

Subject to sale

A subject to transaction is very similar to a loan assumption with the significant difference being that the debt will remain under your name.

In other words, the buyer takes over the mortgage but not the debt. This strategy gives the buyer an added layer of security that a loan assumption cannot provide.

Subject to transactions function as a double-edged sword; you get the benefit of walking away from the situation, but you’re also trusting the buyer to make payments on debt that still you owe. A decision like that should not be taken lightly.

Pros of a subject to

  • You can sell the house even if you own little to no equity.
  • You will save yourself from having to pay anything out-of-pocket.
  • The debt is still under your name, so every monthly payment and the eventual payoff will positively impact your credit score.
  • There is no negative impact on your credit as the mortgage never stops being paid.
  • Depending on your buyer, a subject to can completed in around two weeks

Cons of a subject to

The biggest worry homeowners have when considering a subject to, is the fact that the debt stays under their name. This, however, can be eased by including a clause that requires the buyer to pay the mortgage, in full, within a certain amount of time.

For example, you could sell through a subject to, but the buyer would be required to pay off the mortgage within two years.

Finding a buyer for a subject to

Finding a trustworthy buyer to take over your mortgage is no easy task. With this in mind, you should prioritize buyers whom you know and trust. If no one in your circle is willing or able, then working with an individual or a company specializing subject tos is your next best option.

When it comes to buying houses in complex situations, you can’t beat a professional real estate investor. Let me clarify; I’m not talking about the people who place “we buy houses” signs on the side of the road.

I’m talking about seasoned professionals with years and hundreds of transactions under their belt — the kind of people who thrive under demanding and high stake situations.

Contrary to popular belief, becoming a professional real estate investor takes more than a few “get rich quick seminars.” It requires an intimate knowledge of the entire process, from start to finish. Of course, whether or not you should work with a real estate investor depends on your situation.

In this case, however, the answer is quite clear. Selling your house to a real estate investor will get you out of the situation without costing you anything out-of-pocket. It will also protect or even improve your credit score in the process.

We’re here to help

At the end of the day, whether or not you decide to work with us doesn’t matter. The only thing that matters is, and always should be, getting yourself to a better place financially. There are plenty of strategies out there; you need to find one that works for you.