Sellers Loophole: How to Assume a Seller’s Low Mortgage Interest Rate Without a Formal Assumption
Sellers Loophole: How to Assume a Seller’s Low Mortgage Interest Rate Without a Formal Assumption
This powerful tool can turn your languishing listing into a hot commodity. Here is how it works. As a seller you may be sitting on an interest rate that is 3.5% or lower on your present mortgage. There is therefore both fortunate and unfortunate news for you. The unfortunate news is that if that rate is a fixed rate, it cannot be formally assumed by a new buyer unless it is a government loan (FHA or VA) subject to approval. And if it is a VA loan, a non Veteran can still assume it, but it will affect the original VA loan eligibility until the buyer pays it off. The foruntate news is that you can market your low interest to new buyer by offering him an Installment Sales Agreement / Land Contract. This could greatly increase your odds of a faster sale, discussed later. So what is a Land Contract Sales Agreement?
A land contract is offered by a seller to a buyer that keeps the seller on title, but exclusively gives the buyer the right to receive all the benefits of home ownership including the tax write offs. It is a fully title insured transaction. In effect it puts the buyer in first position to take over the property and automatically grants he or she title once they refinance or pay off the mortgage on the property. No one else can buy the property or be put ahead of the buyer and the seller is bound to make sure the buyer gets title once he pays off mortgage or refinances.
This is not at all like an All Inclusive Deed of Trust or a Wrap Around Mortgage. What is the difference? In an All Inclusive Deed, the buyer takes title to the property but does not formally assume the mortgage loan but uses the same/seller’s mortgage to make the payments. This is risky because if the lender finds out, they can foreclose on the proeprty or pull the loan. To avoid this, the seller has to make the payments to the mortgage company to hide the fact that their is a new borrower and the buyer is not normally named on the fire policy either for the same reason. This complicates claims payouts because the buyer’s name is not on the insurance policy and the check would go to the seller. In this market. lenders would be aggressive in foreclosing if they found out because rates are over double what they have been for the past 2 years.
ADAVANTAGES TO THE BUYER
The buyer can recieve up to a 50% reduction in interest rates on the property depending on how low the seller’s rate is. The buyer, who may have not been able to afford or qualify at 7.5% rates, may now easily qualify at 3.5% or lower. Indeed, a mortgage payment, with an interest rate of 7.5%, on $450,000 is $3146. A 3% rate for the same loan size is $1897. That is huge qualifying power. To give you an idea how powerful this is, a borrower with with an income of $5500 a month trying to buy this home, would have a debt ratio of 57% (not even including taxes and insurance) knocking them out of qulifying ability. The same borrower with a 3% interest rate would have a 31% ratio (not including taxes and insurance and about a 42% debt ratio with taxes and insurance.) easily qualifying for the purchase. The borrower can also avoid formal underwriting by having the seller (or a qualified lender friend) informally qualify him.
ADVANTAGES TO SELLER
The seller has complete control to sell his property to who he wants without worrying about lender or appraisal rules, especially if the property is a fixer. He can market the interest savings as a seller concession thus moving his property quicker. Also, the seller does not have to disclose how low his real rate is. If his rate is 2.5% (many people received that rate in late 2021), he could offer the buyer a rate of 3.5% and make the difference on the payment. This would still be a great deal for a buyer. The payment with 2.5% interest rate on a $450,000 loan is $1778. At 3.5% the payment is $2020. The seller would bank $242 a month offering the higher rate. Another advantage is a quick sale since there is not a lender involved. An appraisal could also be waived if both agreed and any fixer issues that normally would be required by a lender to fix before close would disappear.
DOWNSIDES TO BUYER
Is it risky to the buyer? The answer is, yes there could be risks if the Land Contract forfeiture clause is too restrictive or there is a required balloon payment, but if the forfeiture clause allows for resonable default times consistent with foreclosure notice (30 to 60 days late with the ability to bring the loan current within 90 days), then there is no downside to a land contract for a buyer. And if the balloon time is 10 years or not at all, that is not a considerabel downside because the buyer will probably refinance well before this once rates have fallen back to normal. If the buyer does imporvements to the property, he could also lose all of those if he defaults but this is no different than defaulting on a regular mortgage.
DOWNSIDES TO THE SELLER
The seller effectively becomes the lender in a land contract as the buyer will be paying payments to the seller and he in turn will pay the lender. The buyer has not been formally qualified (I recommend hiring a loan agent to formally qualify them.) Of course if the buyer defaults then the seller will have to keep making payments to the lender and will have to evict the tenant (buyer). Also, the seller will have to provide proof, in the form of cancelled checks from the buyer (12 months or how ever many months if less than a year) that payments have been made on time so that the mortgage payment will not be used against the seller should he or she needs to qaulify for a new home purchase.
` This method is useful for difficult to finance properties, run down properties with code vilolaitons or fixers. Overpriced properties also benefit because the interest rate reduction can be as much as $16,000 a year on a $450,000 between the seller’s rate and current rates. Over 5 years, that is $80,000 sales concession. One downside to both parties is that improvments or repairs done to the propertiy still have to be approved by the seller since the buyer is not technicially the owner until he pays off the loan.
RC Advantage
Northern California Lender
Ralph Migliozzi
Broker Originator
Serving Northern California
NMLS 282851 DRE #01002038
530-330-3073
ralph@rc-advantage.com
