One of
the questions I see asked over and over on the REI newsgroups is "Can
the seller get another loan?" This is a great question because it so often
is one of the objections raised by a seller when a creative offer is being
discussed.
The short
answer is "yes". Only in rare situations would a seller not be able to
qualify for another loan. This, of course, assumes the seller would typically
qualify if they were not going to leave their loan behind. Let's explore
explanations that can be used with the seller.
Straight
Rental
If the
seller doesn't sell the house and plans to move anyway, the seller will
be forced to either lose the property to foreclosure or lease the property
out soon.
Yes,
there are other solutions, but this is what the typical motivated seller
sees as their options by the time they jump on the phone and start contacting
real estate investors. The above responses seem to be the two most common
answers to the "What will you do if it doesn't sell?" question.
So, let's
assume for discussion purposes that
we are not involved at this point. If the seller finds someone to lease
their property, the seller's loan will still be in place. The seller may
or may not have landlording experience and may or may not have a decent
tenant. Those arguments come in handy for other objections, but don't
really affect the "new loan" scenario.
Most
lenders will give the seller a 75% income credit toward their debt ratios.
For an example, assume the seller has an underlying payment of $750 and
a tenant who's paying $1,000. The lender will include 75% of the rental
amount, or $750, as income which will help offset the underlying debt
payment of $750. It's not really a "wash", but it's pretty darn close.
Even
if the rent were only $750, the 75% rental income credit would equate
to $562.50, against the monthly payment of $750. In my experience the
$187.50 is usually not enough to disqualify the seller for the loan.
So, to
summarize, regardless of whether you plan on acquiring the property through
a lease option, Sub2, or some other form of creative financing where the
existing loan stays in place, the worst case scenario should be that the
new lender treats the property as if it's a rental.
Lease
Option
If you've
entered into a lease option agreement with the seller, this may work favorably
for the seller in qualifying for a new loan. Again, worst case should
be that the property is treated as a straight rental. Best case would
be that the lender gives the seller full credit for the debt payment.
Sometimes
the lenders may have different requirements to "prove" the payments are
actually being made by the investor. In the past I've been asked to supply
a letter confirming my agreement to be responsible for the payment. Sometimes
having the seller show the lease option agreement may be enough. Other
times I've had to actually round up copies (front and back) of the cancelled
checks and mail those off.
As far
as I know, I've never had a seller not receive full credit for payments
that I'm making and the sellers will typically contact me when applying
for a new loan. I invite them to do so when having the initial discussion
about the Due-on-Sale (DOS) clause and the "How do I get another loan?"
concern.
Owner
Financing
Generally,
this will be a no-brainer if the transaction is done in a "traditional"
manner. By this, I mean that a document exists that can be shown to the
lender as evidence of the transaction and agreement. It could be a promissory
note and deed of trust (mortgage in some states), contract for deed, or
similar document.
I think
that some investors become more concerned when purchasing the property
subject to the existing financing (Sub2). Since many Sub2 transactions
do not have a "traditional" type document that proves the purchase, a
bit more effort may be needed here.
Depending
on the language in the purchase agreement, this may or may not be an issue.
More often than not my sellers are able to prove the sale by providing
the lender a copy of the agreement. Since my agreement states that I'm
responsible for the payments, this will frequently satisfy the new lender.
If it
doesn't do the job by itself, adding a copy of the completed HUD-1 Settlement
Statement will boost the argument. Regardless of the fact that I filled
the HUD-1 out myself, it does evidence the fact that a sale took place.
Until you know what you're doing, I would recommend allowing the title
company or closing attorney to complete the form for you. If you're buying
title insurance on the deal, it will most likely be done for you anyway.
If you
do decide to do it yourself, you can get a fillable PDF copy at the link
below (under REI Forms). Use a copy of a prior transaction to use as a
guide and/or have someone who is knowledgeable review your work.
www.austinrealestateclub.com/links.html
Time
for a quick side note here. Some loan officers and real estate investors
will offer up the suggestion that you either create a "contingency" document
at the time of purchase or backdate one at the time of the loan application.
Utilizing a document (typically a Contract for Deed) that really plays
no part in the substance of the transaction just for the purposes of making
it easier for your seller to get another loan is not only unnecessary,
but potentially fraudulent.
So, even
on a Sub2 transaction which typically involves less documentation and
is unfamiliar to almost every party who will be involved in the seller's
loan process, proving the payments are being made shouldn't be a big issue.
It may require some additional effort by the investor if the purchase
agreement and HUD-1 are not sufficient proof, but the seller can qualify
for a new loan and will typically receive full credit for their prior
debt payments on the property.
One potential
risk that I have not run across personally might be if the seller somehow
ended up at the same lender who holds and/or services the first loan.
Perhaps that would cause some problems, but again, this is easily addressed
when having the initial DOS discussion.
To summarize,
the seller can get another loan even after leaving the prior one in place
and this objection should be a non-issue when discussing the acquisition
of their property, regardless of which creative technique is used.
Sincerely,
Tim Randle
http://AustinRealEstateClub.com