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The Laurex Process: Exit Strategy Implementation
Yes, The Seller Can Get A New Loan
By Tim Randle
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.texasrealestateclub.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.
Tim
Randle is a full-time investor in the Austin, Texas area
Article Provided by:
Tim Randle
Investor |
