You may not have your home thinking it was merely a short-term investment, yet this can happen more frequently than you may expect.
Whether it’s due to an unexpected family expansion, altered financial circumstances, or the need for a job relocation, sometimes there are situations out of your control. As a result, you may sell your home within two years of buying it.
While it’s best to keep a home for as long as possible, earning more equity and allowing time for value appreciation, life can be uncertain. Consequently, there may come a day when you need to sell and move on with your life.
You may be thinking, can I sell a house after two years? Yes, you can, but you might not make much of a profit from your home sale even if the sale price is high.
Ultimately, the goal should be to remain in your home long enough not to suffer a financial loss on the transaction. Despite the complexity of this situation, it is essential to understand what negative equity is, why it occurs, and – even more importantly – which requirements lenders are likely to require from you.
If you want to make a sale after two years, here’s what you should know about selling your home.
Building Equity With Your House
More often than not, when people refer to a house as an investment, they’re speaking of the home equity it can generate. Equity refers to the portion of your house that you own.
You calculate equity by deducting the amount owed on your mortgage from its current market value. For example, if the market value of your home is $300,000 and your mortgage balance is $200,000, your equity is $100,000.
How to build equity with your house
Homeowners can rapidly increase their home’s equity with a few simple strategies. You can either boost your property’s value, pay off mortgage debt, or both.
Your down payment notwithstanding, below are some options available to achieve this goal:
- Be patient: As local housing markets shift, the worth of your property may also vary. When home prices surge around you and home buyer demand increases, so does your residence’s value.
- Improve your house: Enhancing your home adds to its aesthetic value and can build your equity quicker. You likely won’t get back every penny you invest in renovations. Specific projects offer more return on investment than others, so research wisely before jumping into any project.
- Pay more principal: Mortgage payments are generally structured on an amortization schedule, requiring you to pay installments over a prescribed timeline until you pay the loan off. You pay both principal and interest each month. If you make additional payments towards your loan’s principal each month, the total amount owed will diminish over time, thus allowing you to build equity faster.
- Refinance when rates are down: Opting for a shorter loan term has twofold advantages: you enjoy lower interest rates and pay more toward the principal on your new home. If you have an existing mortgage, consider refinancing into a loan with a shorter amount of time.
What You Should Do If You Have Negative Equity
When the value of your home is less than what you owe on your mortgage, it’s referred to as negative equity.
Below are a few common reasons for negative equity:
- Damaged property: If your home suffers significant damage or destruction, its value will be lower. For example, a home hit with a natural disaster without insurance coverage can cause catastrophic losses to the dwelling and your property’s worth.
- Market corrections to home prices: When the housing market is booming, and a person buys a property, they can become vulnerable to negative equity should prices later plummet.
- Paying too much for the house: Paying too much for a home is a common factor that causes negative equity. You may have had to overpay in a seller’s market to compete with other buyers.
Be Proactive When You Have Negative Equity
It is essential to take proactive steps to avoid negative equity and the subsequent difficulty of refinancing with a different lender and securing lower interest rates.
To that end, here are some potential solutions:
- Keep the property: If selling is unnecessary, you may consider other options to delay or bypass the process altogether. For instance, renting out your property could be a feasible option.
- Reduce mortgage debt: You can save your home from being sold at a financial loss with additional payments on your loan, ultimately shrinking your mortgage debt.
- Repair and renovate: You could upgrade to add value to your home and increase its worth.
If the worth of your home is less than the mortgage, you will have to settle any outstanding debt on your loan to sell it. Before the sale of your property is finalized, you must first receive approval from your lender.
If you attempt to sell your home for less than what you owe on the mortgage, the mortgage lender may undertake several steps before allowing the sale.
Those steps may include the following:
- asking for proof of funds to pay the leftover balance
- forcing you to work with a real estate agent or realtor
- getting a mortgage lender approved valuation
- requiring you to sell other assets to cover the remainder of the loan
Should You Sell Your Home With Negative Equity
It depends.
Although it is possible to sell your home in negative equity, mortgage lenders can only close once you fully pay off (or show that you will pay off) any remaining loan balance. If you can’t sell your property for more than your current mortgage, then be prepared to make up the difference with cash.
Advantages of Selling a House After 2 Years
There are tax implications whenever you sell your home. After two years, you may be eligible for a capital gains tax exemption.
From the point of view of the IRS, your home is a capital investment. Thus, when it’s time to sell, you need to pay taxes on any profits made from the sale.
Fortunately, the federal tax code enables you to use the Section 121 exclusion if you inhabit your primary residence for two of the previous five years before selling. The exclusion allows you to bypass up to $250,000 (for individual filers) or $500,000 (married couples/joint filers) from the purchase price from your tax liability.
The two-year market is important because short-term capital gains tax rates can be as high as 37%.
What to do If You’re Selling Your Home After Two Years
Homeowners have seen their profits increase in the seller’s market we’ve encountered in recent years due to soaring home appreciation rates across most areas of the nation. It has been relatively easy for many individuals to profit within only two years of homeownership.
Yet, as interest rates continue to increase and the market begins to cool off, this may not be the case for long. As a result of your home’s value stagnating or even decreasing since you bought it, you could find yourself losing money on an underwater mortgage if you aren’t proactive.
With a growing family, varying financial conditions, a job requiring relocation, or even an irresistible offer from a buyer, it is more common than you think to purchase a home and only live in it for two years.
On the surface, relocating again and soon may seem like a nuisance; however, it can be even more taxing when there are unexpected expenses.
Although it may be tempting to think that a home will appreciate after a year or two of ownership, this is generally not the case. It typically takes longer than 1-2 years for a property’s worth to increase significantly.
On average, you need five years (five-year rule) for noticeable property appreciation (the rule of five years). Establishing equity in your house is not only about reaping significant revenue—it’s also a must to pay for the costs of selling your house.
You may be on the hook for closing costs, including:
- agent commissions
- prepayment penalty
- property taxes
- transfer taxes
If you find yourself in a place where selling your home after two years is the only option, you shouldn’t feel guilty about it. Many people are in this same situation for various reasons, and it’s important to remember that you’re not alone.
Rather than selling your home, you could rent it out. Renting or using the house as an investment property will buy you more time to accumulate enough equity while the real estate market fluctuates.
If renting is not an option, then a cash buyer should be able to assist you in getting a fair price and minimizing closing costs and fees.
Conclusion
Your home is not merely a place to rest your head; it’s an investment that deserves the utmost care. Rushing into its sale could easily result in losses instead of gains – something you want to avoid. It pays to research and ensures you make intelligent decisions when it comes time to sell your home after two years.
Selling your home after you meet the two-year mark enables you to avoid costly short and long-term capital gains taxes, but consider its appreciation and how much you have left on your mortgage. You want to eliminate negative equity before selling your property to maximize profits.
Once you decide to sell, it’s crucial to collaborate with a reliable cash buyer to get an equitable and fair offer.
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