|
Both the grant (property) deed and seller's mortgage are recorded at the county clerk’s office.
It is to the seller's advantage to "partition" their “carry back” trust deed into 1st and 2nd (lien) trust deeds. This prevents the new owner from obtaining additional financing (i.e.3rd Trust Deed) and weakening the equity position should the seller have to repossess the home in case of non-payment.
The are two advantages to a homeowner marketing their property with seller financing: 1) they will attract a larger potential group of potential buyers; and 2) they may obtain a premium sales price for their home.
This is particularly true when the home has unique features, that are of value to the buyer, but does not add value to a bank appraisal (i.e. an un-permitted room additions).
This combined with the receipt of "passive income," which is often received by the sellers in their "non-income earning years," and delays (or possibly eliminates) tax consequences that result from the sale.
The advantage is that the buyer may obtain a mortgage despite their:
* Length of time on the job
* Income Level
In addition, both buyers and sellers can reduce closing costs by eliminating middle man lenders.
Here are the steps for the buyer and seller to begin the process.
1) Agree on a purchase price acceptable to both parties.
2) Open escrow and order title search.
3) Agree on the buyer's FIRST TRUST DEED rate and length of loan.
4) Agree on the buyer's SECOND TRUST DEED (This is an example of "PARTITIONING") rate and terms of the mortgage.
5) Verify the buyer's credit score (FICO) by reviewing the entire credit report for errors and omissions.
7) Set a date for the sale to "close escrow."
8) Complete all disclosure and transfer statements (termite, inspection reports, roof etc).
The Pitfalls of Seller Financing
1) If a buyer fails to pay their mortgage payments, property taxes or to maintain property insurance, the seller may have to foreclose and repossess the home by evicting the residents.
2) Seller will not receive full payment from the sale of the home until the buyer's loan is paid off.
3) The seller can choose to sell their “deed of trust” to an investor for a lump sum cash payment but usually at a greatly reduced return.
PLEASE NOTE: For seller who DOES NOT own their property “free and clear,” seller financing is commonly known as a “wrap” or “wraparound mortgage." This type of mortgage violates the lender's “due on sale clause” that ALL mortgages (written after Jan 1st 1986) contain.
Violating this clause will certainly result in the lender “calling the loan due” (enforcing the clause) immediately demanding payment. All home loans contain a "due-on-sale clause."
Once the lender discovers this “wrap around mortgage” (remember: there is a paper trail of the transaction recorded at the county clerk’s office) the seller’s lender will call the loan “due and payable .”
The seller (who deeded the property over to the buyer) will not be able to REFINANCE the home because there is now a “cloud on title."
After 30-60 days of non-payment the seller’s lender will start the foreclosure process.
When the lender begins “posting (foreclosure) notices” on the property, the buyer will PANIC and call the lender.
Shortly thereafter the buyer will contact the local district attorneys office to file a report for FRAUD. Penalties for the seller can include forfeiture of property, legal fees, loss of credit rating - as well as a civil suit from the buyer. Buyer is not complicit for the fraud because the BUYER is not responsible for the seller’s due on sale clause.
Heirs or spouses who recieve the property in a survivorship or divorce settlement are exempted by the Garn-St. Germain Act of 1982 (a federal law) which created several situations where non-assumable mortgages can be assumed by the new property owner.
If a homeowner dies and a relative, child or domestic partner inherits the residence, the law prohibits enforcement of the clause when ownership is transferred. The owner does not have to qualify for the loan.
Also exempted is a homeowner who transfers the title to the property into a "trust."
The trust an be used as a "shield" to circumvent the due on sale clause. The trust simply provides the original homeowner with a minimal interest in the property which can be as little a one percent.
Copyright 2007 Daniel Dobbs, real estate broker.
|
