FAQ

Is taking a mortgage over Subject-To legal?

Fillable HUD-1 This is a standard form that title/escrow companies and attorneys use to build settling statements. Please note lines 203 and 503. CFR-2012-title24-vol5-part3500-appA.pdf (govinfo.gov) This link is the instructions to fill out the HUD1.

Please note: this is a Code of Federal Regulation (CFR) document. Page 396, second paragraph states: "Line 203 is used for cases in which the Borrower is assuming or taking title subject to an existing loan or lien on the property." Would the federal government put this in the Code of Federal Regulation if it was illegal?

What about the "Due on Sale" clause?

This rarely happens, but if the bank sees the deed has been transferred, they could request the remaining loan balance be paid in one lump sum because they believe the property has been sold (hence the name Due on Sale).

Our Solution:

Purchase the property in a land trust. “A lender may not exercise its option pursuant to a due-on-sale clause upon a transfer into an Inter Vivos trust in which the borrower is and remains a beneficiary” (The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)). We would create a land trust and note the seller as one of the beneficiaries, our LLC would be the other beneficiary. Alternatively, we could Deed the property back into the seller's name and create a lease option where the purchase price is the remaining loan balance and the monthly payment mirrors the current payment.

What happens if the Buyer defaults?

In order to mitigate the chances of this happening, we hold 2 months of payments in Escrow. We would also incorporate a Performance Clause in our contracts which states that the house is effectively transferred back in the Seller’s name if the Buyer defaults after a 60-day period. At that time, the Seller keeps the down payment and they can re-list the property and potentially sell at a higher price if the market has improved. An additional benefit is that all improvements made to the property are inherited. If Buyer was ever hit by a bus or abducted by aliens, this is how it would play out. The documents that are put in place upon the sale of the property guarantee a smooth, seamless transition back to the original owner.

How will this affect my DTI (Debt To Income)?

This can be handled a number of different ways:

We can use a payment statement from the servicing company to show a lender that the loan is being serviced by someone else. Since we're using a loan servicing company, after 3-6 months you can show your current lender that the payments are being taken care of by a third party, and they will then start to reduce the impact of that debt on your DTI. After 12 months, 100% of the mortgage is removed from the DTI. We would do this by talking directly to the Underwriter for the new loan, not the Loan Officer. In this video, Matthew Bell, a Sr. Loan Officer since 2005, explains more about this (https://youtu.be/W969oCEpjX0).
We can use a Lease Purchase contract that allows you to report the rent and, in turn, allows you to use our down payment towards your new purchase without seasoning.
Another option would be using a Bridge Loan for the down payment on the new purchase.
We often leverage lenders in our network who can originate loans in all 50 states. We recommend contacting Matthew Bell of the Bell Group (https://bellgroupcmg.com/ , Tel, (972) 999.1900). He can discuss this at length with you, and even send you next steps.

What if the market drops?

We are not buying the property based on the value of the real estate, we are buying the property based on the Seller leaving the financing in place. With interest rates skyrocketing into the 7%+, a 3% interest rate is more valuable than any market shift.

How are utilities and insurance handled?

We will have our insurance agent replace your current policy with our policy. The Seller will be added as an additional insured. So, not only are we on the insurance policy, but you will be on the insurance as well. And as for the utilities, we would swap them into our name.

What if something happens to the home?

Accidents happen--including home fires and natural disasters. The Buyer is required to carry home insurance on the property for this very reason. The Seller is listed as an additionally insured party until the note is paid off. If something were to happen to the property the Seller's interests are fully protected by the insurance policy.

What are the steps required to complete these types of transactions?

A Purchase and Sale Agreement would be signed with the agreed upon terms to include Agent Commission being paid by Buyer.

Escrow would be opened with a Title Company/ Attorney of the Buyer's choosing. We work with an entire network of Title Companies/Attorneys throughout the United States.

Prior to closing, the deed is transferred, loan servicing is set up with a company like Southern Loan Servicing (Owner Financed Loan Servicing – Southern Loan Servicing), and commissions are paid just like every other real estate transaction.

A power of attorney/authorization to release information will be signed in order to add ourselves to the insurance policy and name the seller as an additional insured.

What am I responsible for after closing?

Since you are no longer the owner, the buyer will now be responsible for collecting rent, utilities, taxes, and maintenance. The buyer also gets all the upsides of ownership including all tax write-offs, appreciation, and cash flow.

How will I get my monthly payments?

The servicing company will deposit the money directly into your bank account and email you a receipt. Arrangements can be made if you prefer to receive your payments in a different manner.

What happens if the owner dies?

The underlying debt and monthly payments will pass on to your heirs. Consult with your attorney on how to best do this.

Additional Resources

Check out Pace Morby’s Youtube channel. He does a really good job of presenting case studies on purchasing homes using creative finance.

Frequently Asked Questions

Sellers Questions Answered