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When you search for a no-down-payment opportunity, it may not be necessary to look any further than the existing financing on a prospective property. Investors should always determine the remaining balance of the existing mortgage, and find out if the existing loan is assumable. Today, most government-insured loans, some adjustable-rate mortgages (ARMs), and some non-conforming or "sub-prime" loans contain an assumption clause. Assumability
Most of these assumptions will require buyer qualification, which is similar to the qualifications necessary when obtaining a new loan. However, other loans may be assumable without financial qualification--needing only the lender's prior consent.
Assumption clauses are listed in the note and/or the security agreement. As an investor, you should be willing to help the sellers review these documents, or you can call or visit the lender to determine if a loan assumption would be possible.
If the property does not have assumable financing, the existing financing on the property may still allow you to complete your purchase. "Subject to" financing
Line 203 of the HUD1 settlement statement reads, "Existing loan(s) taken subject to." This wording suggests that there is an opportunity to take title to a property that has underlying loans remaining in the seller's name.
It is very important to understand the liability difference between (1) assuming the loan, and (2) buying a home "subject to" existing financing. In the case of default on an assumed loan, a lender will generally first pursue the new borrower, and then come after the original debtor.
If the property is being purchased "subject to" the existing financing, the original borrower will remain solely responsible for the loan as per the original note. Seller motivation
Why would a seller deed his or her house to you using the "subject to" technique? The motivations are generally "time" and "debt-service-payment relief." A seller could be transferred, purchasing a new home, divorcing, or experiencing financial distress, etc. There are many reasons for wanting to sell a property quickly. Qualified buyers
A home may sit on the market for 60 to 120 days before a qualified buyer is found. Under ordinary circumstances, it may require an additional 45 to 60 days for a buyer to get financing and close. During this period, the seller continues to make payments on the loan.
Both of these time periods could be substantially shortened with a "subject to" sale.
Furthermore, if the seller is buying a new home, then he or she can use the "subject to" purchase agreement to show that someone else is making the payments--thus allowing the seller to qualify for a new loan. Selling expense
When the sellers are highly leveraged, and will need quick relief from payment responsibility, a "subject to" sale makes sense. Unlike hiring a real estate agent, there is no 6 to 7 percent commission, or the typical 3 percent in closing costs. (On a $100,000 property, those combined expenses total $10,000.)
Throughout the typical three to six month period that's required to find a qualified buyer and close on the home, the seller has continuing monthly mortgage payments, and also has utility, maintenance, and repair expenses. A "subject to" sale can shorten time frames and greatly reduce expenses. Foreclosure
If a seller has an assumable loan and is facing foreclosure, the "subject to" technique can offer a "cure." Investors can often bring the defaulted loan current at the closing and then accept title--"subject to" the existing financing. This solution provides a good payment history "after the cure"--which allows the seller to qualify for future loans. Financial rewards
The "subject to" technique will allow you to purchase properties with great terms, and to offer great terms to a subsequent buyer.
This creative financing technique provides you with a fast and easy sale--along with excellent financial rewards!
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