Owner Financing With A Mortgage Already On Property
I am new to all of this so please help. We had planned on renting our property. A couple who originally signed a lease option came back and said that they wanted owner financing instead. Credit is weak, but I think they will be able to get a loan in a year or so. Can we owner finance if we have a mortgage on the property already? What happens with due on sell clause? Is there another way around it? They want to get insurance and taxes in their own name so it would need to be something that I could record, right?
Yes, you can. There is, however, risk in doing what I think you are suggesting. If you are looking to do a subject to sale (i.e. a sale subject to the existing financing) you may be at risk if the existing lender exercises due on sale clause since your second mortgage is likely to get wiped out if there is a foreclosure.
What you can offer to do is a seller carryback if they they get a new loan. You are better off keeping the lease option in place until they can get financing. Then you can sell with a carry back without risk of losing your equity in your note.[ Edited by edmeyer on Date 11/16/2004 ]
Others wil check me on this please but I think a Land contract would be a better option for you. Correct me if I am wrong please, but if yo did seller financing you would want to record it to get a position on the title. If you owe say 80K on a 100K house and do seller financing for sale price of 110K then I don't think you will be able to position yourself correctly on the title, and I assume your mortgage company would find out and call in the DUE on sale . Please correct me on this anyone
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How much option consideration did you collect? Owner-financing should net you 10 percent down and a premium interest rate. Otherwise, I see no advantage to owner-financing it for them. The risks are greater, since you may have to foreclose if you actually finance it (not with a LC, though, in many States). You could do a wraparound mortgage. FYI, as a subordinate lien-holder, you can continue paying on the first (which, in this case, you would do anyway, since it is in your name).
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We have a verbal agreement to a little over 5% down, with a 5 year balloon, @ 9%. This payment puts them at the same payment we had on the lease option, but they are now responsible for taxes and insurance. I know we have to keep the basic insurance and have already checked with insurance company about that and cost would be much lower if we had the purchase agreement over lease agreement. How long could it take to foreclose vs evict? How do you do a wrap around, wouldn't they have to assume the first?
No, you would wrap the first with a larger loan. Foreclosures can take several months--depending upon your State and other variables (if they go bankrupt, for instance). Your attorney should do the wrap.
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Joe and leaseoptionking are correct, you are going to have to wrap the debt with either land contract or contract for deed so you do not need to retire the underlying lien at the close of a seller financed sale
Both Land Contracts and Wraps may trigger a due on sale clause if your loan is not assumable. I recently read that by law, in some states, escrow companies are required to report to a lender if anyone tries to wrap their loan. You might want to keep this in mind particulary if your buyer cannot qualify for a loan.
Hopefully, you will get some responses as to the likelihood of a due on sale clause being exercised with a wrap or land contract. I did a purchase years ago using a land contract where, if memory serves me, the only thing that was recorded was a memorandum. In that case it worked out well and I held the property for about 5 years. The difference is that if there was a loan call, I would have qualified for new financing.