I am sure many people are in a situation like this: I’ve owned my house for a while and now there’s a ount of equity in it which I would like to tap into. One option is to get a Loan or HELOC. Another is to refinance. But both involve credit scores, a mountain of paperwork, appraisals, inspectors, and whole load of other BS, and in the end I didn’t even qualify. Plus the equity isn’t IL installment loans free – the bank is really loaning me my own money and charging me interest. So I wondered why can’t I just sell the house to myself? I’d be happy to buy it for the higher price – assuming it appraises. The mortgage company shouldn’t care since they know i’m already a good borrower. I asked my realtor this question and after looking into it, he just said it wasn’t allowed but didn’t know why. So now I’m having to go through all the BS of selling the house and search for another place to live even though I really don’t want to move out. Any ideas out there?
Update: Sorry I fired that posting off in frustration. Always a mistake when lots of thoughts are flying around in your head! I should probably scrub it and repost but that’s fine I’ll leave it as it is and instead add the following clarifications: The specific situation I was in was w.r.t an investment property in Texas. So a couple of big differences: Back when i was trying to do this, no-one would do me a cash-out refi on an investment property in Texas. Things may have eased up a bit since then, but even at the best of times, you’re limited to 75% LTV if I’m not mistaken. Contrast that with 90% LTV on a new purchase and – depending on how much equity – it could make or break the whole thing. I don’t recall the exact figures but I remember going through the amounts and deciding it was not so worthwhile.
Assume you could do this. Where would you get the money to pay off the remaining loan? And if you want some liquid cash out of this operation, where does that cash come from?
The answer is that you would take a new real estate loan. And that would involve credit scores, a mountain of paperwork, appraisals, inspectors, and whole load of other BS, and in the end you might not even qualify.
So selling the house to yourself in order to pay off a loan and take on a new one is basically just refinancing with extra steps.
It’s true that a lot of your net worth might be in form of your home, but just like you can not have your cake and eat it, you can not live in your net worth and spend it. So the only way to turn your home into cash is by downsizing into a less expensive home. Sell your current home for as much as someone will pay you, buy a new home for less, use the profit to pay off the loan and keep the rest.
Generally, the amount of paperwork required for a refinance is less than the amount of paperwork required for a purchase. There are a lot of variables including COVID-19 relaxations in appraisal requirements and various appaisal waiver opportunities that your broker or lender may be able to help you qualify for.
If you’re trying to take money out of the property, though, you’re asking the bank to take on more risk. They’re giving you a check, they now have a loan with a lower LTV (loan to value ratio), etc. So they are going to want to do some level of due diligence. Unless the home has declined in value since you purchased it (in which case you probably wouldn’t have equity to pull out), if you didn’t qualify for a refinance, that strongly implies a problem with your credit score. If you’ve got a low credit score and you’re trying to do a cash-out refinance, that’s asking the bank to take on a lot of risk. If you’re having trouble keeping up with your other bills and you’re trying to tap your home equity, that means there is a decent risk that you’re in financial trouble and will start missing mortgage payments in the not-so-distant future. If that happens, the bank would much rather there be more equity in the property because that makes it much more likely that they’ll be able to recover the balance owed on the mortgage should they need to foreclose.
Functionally, selling to yourself would just be a convoluted way of doing a refinance. You as the borrower would need to get a mortgage and you’d need to do the full set of paperwork rather than the streamlined paperwork required for a refinance. You’d then have to pay transaction costs for things like title insurance and real estate taxes which are unlikely to be cheap. In many places, the purchase would also tend to increase the amount of future property taxes since many places limit increases during the time between sales. In the end, you’d have more paperwork and more fees than a standard refinance so it’s not something that would ever make sense.