Recently updated on February 11th, 2023 at 02:18 pm
What You Will Read In This Article
Working to pay off debt can seem endless. People look for countless ways to speed up the process, such as taking on a second job or cutting down their living expenses. Selling your belongings is a great way to take off chunks of your debt. You can have a garage sale, sell your unnecessary vehicle, or get rid of your least favorite clothing items.
However, is selling your house to pay off debt something you should consider? Well, the answer is “it depends.”
For more details, we put together the information below for you to read before making your decision. In this article, we’ll cover when it’s a good idea to sell your house to pay off debt, and how you can do it the right way and finally break away from your bills.
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Questions to Ask Yourself Before Selling a House to Pay Off Debt
Before jumping the gun and selling house to pay off debt, ask yourself the following questions:
Is the profit from selling your home enough?
Sure, selling your house can wipe out a large portion of your debt, but is it going to be enough to break free? If you don’t change your spending habits and create a realistic savings plan (stay tuned), you might end up right back in the same position. Or worse, if you have to sell your home at a loss, you could be facing further financial hardships.
Can you get a home equity loan instead?
A home equity loan is where the bank lends you money using your home’s equity as collateral. These loans can give you a large lump sum of money, which would help you pay off any debt you may have. As a result, you could reduce your bills and still keep your house. If you are looking for the best alternative to selling your house to pay off debt, a home equity loan is what you want to seriously consider.
How much is the rent in your area?
Even if you sell your house, you’re still going to have to live somewhere. It’s essential to consider the rental costs in your area, so you know what you’re getting yourself into. The last thing you want is to sell your house and then struggle to make rent every month; that’s extra stress you don’t need.
Are you prepared to move out of your house?
Understandably, you’re willing to do almost anything to get out of debt. Nearly 20% of people claim that debt hinders their productivity and overall quality of life. However, are you willing to move out of your house and will that cause you more stress? Make sure to think it through before deciding to sell.
Should I consider bankruptcy?
Bankruptcy is an option for those who have little or no means to pay off their debt. Filing for bankruptcy has a nasty reputation because of what it does to your credit score; however, it might be the only reasonable option depending on how much debt you have and the means you have to pay that debt back, even after selling your house to pay it down.
Should I seek professional credit counseling?
Sometimes seeking professional help is a viable option for those struggling to make payments to their debtors. A certified professional can go through all of the different options to see if there’s a better alternative to selling your home. Don’t ever think you are beyond seeking professional help, even if it is to just validate what your strategy is for selling your house to pay off debt.
Ways to Sell Your House and Save Money
Here are ways you can save money after selling your home to help your debt situation:
For sale by owner (FSBO) is typically the best way to maximize profits when selling your home. When you take this route, you don’t need to hire an agency or management team. As a result, you get to keep all of the profit when someone buys your house. However, selling your home on your own can be time-consuming and complicated, so we recommend you set aside time if you choose this option.
Sell With Flat Fee MLS
If you do choose to go with a real estate agency, you can choose to go with a flat fee MLS service. A flat fee MLS is where the broker agrees to list your house in the Realtors MLS for a low flat fee, rather than a percentage of the sale. This could help you to get more money from your home, depending on how much you sell it for. Keep in mind, these flat fee MLS brokers will not be providing you with other listing agent services, they will only be listing your house and then you are responsible for the selling tasks. Lastly, it is important to make note of the fact that a flat fee MLS company is different that a flat fee Realtor, they both charge flat fees but the level of service they provide is very, very different.
Negotiate Low Real Estate Agent Commissions
If you choose to use a real estate broker, a large chunk of the sale price is going into the pocket of the real estate agent when you pay them their commission. After all, they’re the ones who put in all the heavy lifting when selling your home. However, if you want to save money after selling your house, try to negotiate the lowest real estate agent commission possible.We Negotiated Discounts With Great Agents. Find One In Your Area.
Ways to Keep Yourself Out of Debt After Selling
If you do sell your house, you should be one step closer to paying off those pesky debts. However, you have to ensure you do everything you can to keep yourself out of debt after the sale. Otherwise, it’s back to the drawing board. Here are some tips to keep yourself out of debt after selling your house:
Determine What Got You In Debt
If you’re struggling with debt, you’re far from alone. According to a source from CNBC, the average American has over $90,000 in debt. Debt is so typical that almost anyone you talk to is either struggling with paying it off or struggled in the past. The best way to keep yourself out of debt is to know what gets you there in the first place.
One of the leading causes of debt is buying things you can’t afford. It might not always be your fault, After all, your credit score and income gave the green light! However, just because we can make the purchase now, doesn’t mean it’s going to be the right decision in the future. Always ask yourself “Is this worth getting into debt over?” before swiping your credit card.
Another reason why several people fall into debt is that they don’t know how to manage money properly. Selling your home might be an excellent way to get out of debt, but if you don’t manage your finances the right way, you’re going to fall back into debt quickly. If you’re not great at managing money, consider speaking with a reputable financial advisor.
Don’t Buy More House Than You Can Afford
When you do purchase another home, remember not to buy a house you can’t afford. Although it might be tempting, this will only put back into more debt and negatively affect your future. If the debt to income ratio for your dream house is too high, it would be wise to find something cheaper. A good debt to income ratio when paying a mortgage is around 43%.
Here are some warning signs that you likely cannot afford a home:
- It’s way out of your budget. We all have dreams and aspirations to find the perfect house. However, we need to be realistic about how much we can afford. If you purchase a house you can’t afford, you’re likely going to lose it in the future. It’s best to stay within budget and make gradual upgrades.
- You depend on future income. Although everything might seem steady now, future income isn’t always guaranteed. It would help if you always accounted for emergencies and not make assumptions based on future income and expenses. Your expense column will increase parallel with your lifestyle, so consider that before buying.
- You can’t afford a 20% down payment. A 20% down payment is an industry-standard. If you cannot come up with enough money to get your foot in the door, you should find a more affordable option.
- You’re thinking with your emotions. Perhaps you want to impress your friends or showcase that you’re “living the dream”. While this might seem like a good idea at the time, it’s detrimental for your future. People will respect you more when you buy a house you can afford and always make payments on time.
- You’re paying more than 30% of your income towards your mortgage. For over half a century, the United States government recommends that you should only pay up to 30% of your income for rent. This isn’t an actual law but well thought out advice. If you’re paying more than 30%, you’re going to end up working hard to barely get by.
Learn to Set and Stick to a Budget
Setting and sticking to a budget can be tricky, but once you get into the habit, it’s relatively easy and fun. The reason why so many people fail to stick to their budget is that they set unrealistic expectations. You don’t need to sacrifice your lifestyle to save money. Here are some things you can do to create a reasonable budget and stick to it:
- Set something realistic. Above, we mention that setting something unrealistic will only set you up for failure. Instead, try setting a percentage of your income that won’t drastically change your lifestyle. You could start somewhere around 10%, then when you get comfortable opt for 15% and so on. Baby steps will take you further than you think.
- Develop a meal plan. Planning your meals ahead of time is a fantastic way to save money. Spontaneous munching can really add up, especially when you’re eating out for most of your meals. When you create a meal plan, you’ll likely buy in bulk which will help you save. Besides, cooking and preparing the meals can be an enjoyable new hobby.
- Learn self-discipline. Having the urge to buy something can be challenging to fight. When you have a budget, it’s not that you have to say no to everything, but it’s best to say “net yet”. If your friends want to go out partying every weekend or you can’t seem to help yourself from buying new clothes, try to stay home instead.
- Find someone who will keep you accountable. Just like working out in the gym, finding yourself a budget buddy will help ensure you don’t fall short. The two of you can keep each other motivated, give support, and make sure you stick with it. When you and your friends are in the mindset of saving, your creativity will allow you to find other affordable activities to enjoy.
- Track your progress. You don’t need to overwhelm yourself with complicated spreadsheets and analytics, but tracking your progress will help make sure you’re successful. See areas where it’s easy to save money and find where you struggle. Allocate more of your budget towards things that matter and try to minimize unnecessary expenses when they arise.
Save for Emergencies
How much more peace of mind would you have to know you have the funds to get you through an unexpected crisis? Most people would agree that it’s essential to have an emergency fund, but so many people neglect this piece of financial advice. However, having an emergency fund will protect you from unexpected events and keep you out of debt.
Several American families fall into debt because of one of life’s curveballs. Whether it’s a car accident, hospital bill, natural disaster, or sudden death, expenses can occur out of nowhere and leave you financially unstable. Creating an emergency fund is surprisingly simple, and you can start today.
The size of your emergency fund depends heavily on how stable your income is. If your income is high and your expenses are low, you don’t need to allocate as much towards emergencies.
However, if you’re the sole breadwinner, dependent on commissions, self-employed, you’ll need to be more frugal and prepare more cash for emergencies. In this situation, you should try to add at least six months worth of expenses to your emergency fund.
You should always make sure your emergency fund is liquid and easily accessible. The best places to keep your emergency fund is in a checking account or money market mutual fund that has a debit card. Try to refrain from using your emergency fund for things that aren’t an emergency.We Negotiated Discounts With Great Agents. Find One In Your Area.
What Are the Risks of Selling Your House to Pay Off Debt?
Although selling your house to pay off your debt may seem like the best option, it does come with some serious risks if you aren’t careful. If you sell your house, it might be more challenging to buy a new one in the future. You’ll also be obligated to pay rent, and if you’re struggling to pay off debt, paying rent isn’t going to be easy.
Relying on selling your home to pay off debt isn’t the best way to think. Selling a house can take time and requires a lot of work. If you can find a better way to pay off your debt, you’re better off choosing the alternative. However, if you’re already planning on moving or know a few potential buyers, it could be a good idea to put your home back on the market.
What Can You Do Today?
If you’re knee-deep in debt, you’re likely under a lot of stress. It’s essential to try and stay calm and remember that there are options. Here are a few things you can do today to better your situation:
- Speak with a certified debt counselor who can advise you on why you’re so deep in debt and some ways to help get out.
- Begin researching ways to sell your home and calculate its value to see if it will be enough to remove your debts.
- List out the pros and cons about selling your home to see if it’s the best option.
We hope this article was helpful and gave you some insights about what you’re getting into when selling house to pay off debt. While the process can seem overwhelming, following the steps above can help reduce some of the stress, and make things a little easier.