Creative Finance
Creative Finance Decision Tree
Creative Finance Decision Tree
Subject To is a form of assuming a loan without going through the normal loan assumption process. This is done by including an addendum to a new purchase agreement that has the terms of “Subject To” the current debt in place. This typically works best when the seller or property is in distress, and needs to exit the property with less out of pocket expenses.
How it works
– Buyer takes rights to the deed for a property while the seller’s existing mortgage stays in place.
– The Deed is transferred to the buyer “Subject To” the current debt terms.
– The seller does not transfer the mortgage out of their name.
– Subject To Addendum is included into the agent or seller purchase agreement.
– Property then goes through closing just as any other transaction using a title/escrow company or closing attorney.
– Buyer can take responsibility for any additional liens on the property.
– Seller has no further responsibility for the mortgage, utilities, taxes etc.
– Sellers can likely exit with some cash in their pocket.
What are the benefits?
– Buyer can take responsibility for any additional liens on the property.
– Seller has no further responsibility for the mortgage, utilities, taxes etc.
– Sellers can likely exit with some cash in their pocket.
Things to consider
This is legal
-Fill-able HUD-1 is a standard form that title/escrow companies and attorneys use to build settling statements. Please note lines 203 and 503 mention it directly.
Due on sale clause
-Very low chance a lender could claim Due on Sale, which requests payoff of the mortgage.
-There are different strategies to avoid this depending on the situation. Also the lender will typically be willing to work with us after we explain the situation.
Debt to Income Ratio for Seller (DTI)
-Due to the mortgage still being in the name of the seller, the debt is still reflected on their credit.
-However, the amount can be drastically reduced almost immediately, then removed after 1 year or less of on-time payments. Sellers can still qualify for a new mortgage depending on the situation.
Seller Finance Process
Seller Finance is pretty straightforward. In this scenario, the seller has no debt on the property and is willing to carry a loan directly with the buyer. There are always ways to create terms that can be beneficial to all parties, and that is where getting creative can give an edge to our strategies compared to other groups.
How it works
-Seller and buyer discuss the purchase price, down payment and other concessions. This is dependent on the situation and what the seller would like.
-Buyer writes up an offer aimed to achieve all of the seller requests.
-Buyer adjusts the terms to achieve monthly payments that leave enough margin for a positive investment.
-Loans are serviced by a third party and executed along with the closing process as usual.
What are the benefits?
-Sellers can typically get a higher purchase price when they’re flexible with terms.
-Seller can avoid a capital gains taxable event on the sale of the property.
-Ability to close faster without the full loan process of a traditional lender.
Things to consider
-Benefits are enhanced when a seller is flexible with terms.
-Terms are created based on the seller’s needs.
-We include a Performance Deed contract which removes the need for a full foreclosure process in the event of defaulting on payments. This provides security to the seller that they can take control of the deed quickly.
Hybrid Process
In some instances, a seller may have an existing mortgage, but also a larger piece of equity that they don’t want to walk away from. In this situation, the buyer can do a hybrid of Subject To and Seller Financing. Combining the two strategies provides an opportunity to offer the seller a larger down payment and ongoing monthly payments.
How it works
-Seller and buyer discuss the purchase price, down payment and other concessions.
-Very dependent on the situation and what the seller would like.
-Seller transfers current debt to buyer through Subject To Addendum.
-Buyer creates debt carried by the seller, in addition to taking over the seller’s current loan payments.
-Property then goes through closing just as any other transaction using a title/escrow company or closing attorney.
What are the benefits?
-Great way to help a seller who needs to move on from a property but can’t get their asking price on the market.
-Can be flexible with terms to benefit both seller and buyer
Things to consider
-Performs best in a high equity scenario.
-Benefits are enhanced with a seller that is flexible with terms.
-Terms are created based on the seller’s needs.
-We include a Performance Deed contract which removes the need for a full
foreclosure process in the event of defaulting on payments.
-Provides security to the seller that they can take control of the deed quickly.