Lets say a person is buying a home from someone. The purchase price is $250,000.00. The buyer has $30k for a down payment. But can only qualify for 170k in bank financing. So is short $50k to purchase.
The seller is trying to make it work for the buyer but cannot lower the sale price. The seller is willing to defer the $50k for a few years. Say 5 years. Then do payments spread out over a 20 year period with a balloon at the ten year mark at 7% interest.

What would be the down side to something like this?

Thanks guys and gals

The first will have a right to foreclose and the seller will be the second.
Unless he is willing to pay off the first to regain the title, he's (the seller) screwed if it were to foreclose.
A real estate attorney could give a better answer and may need to know the state the home is in.
The other issue is that I think the real estate and other markets will be in readjustment mode once this starts to blow over.

The potential downside to the buyer, they pay more, maybe a lot more than the house is worth in the foreseeable future.
The potential to the seller, they loose some or all of the $50 grand.

The seller could create a separate escrow contract for the balance with the details, length and interest, that works for both parties. Just a thought.

Jim

quote:

Originally posted by 220-9er:
The first will have a right to foreclose and the seller will be the second.
Unless he is willing to pay off the first to regain the title, he's screwed if it were to foreclose.
A real estate attorney could give a better answer and may need to know the state the home is in.

The borrower would stop paying the seller before he stopped paying his mortgage. Ie the house may not go to foreclosure, but the seller could still get screwed. Then what? law suite? good luck..

1. Buyer is buying a house he can't afford. That's generally a bad idea.

2. If buyer can't keep up with the payments, the seller will have lost his house and the payments.

3. If you are being transparent with the bank, the loan likely won't be approved.

This is what private mortgage insurance is for. Everyone hates it, but some people need it.

If the seller doesn't need the money right away, an installment purchase agreement might work. Buyer lives in the house, Seller keeps title. Buyer makes monthly installment purchase payments. If the buyer makes all the payments (e.g. 30 years), seller transfers title. 5 years in, seller gets a loan from the bank, and pays off the remaining balance.

The risk is a little better managed for the Seller. The Buyer is in roughly the same position, where he loses the payments he's made on the house if he stops making payments (which is similar to renting).

The seller can further protect himself by making it 5 years worth of payments, plus a 60 day escrow period at the end for the buyer to make a balloon payment for the remainder of the agreed upon purchase price.

Of course, consult a local attorney because that sh*t is hardly standard.

No matter how you dice it the seller will always be in a second lien position to the bank. If the bank forecloses, the seller is wiped out.

Yeah, if the buyer can’t qualify for the whole price...there is no way in hell I’d break it into two different loans just for the buyer to be able to get a loan.

Sounds like a bad idea for everyone.


I think maybe a rent to own type of agreement would be better. Seller can still retain title if buyer does not pay.

quote:

Originally posted by old rugged cross:
Lets say a person is buying a home from someone. The purchase price is $250,000.00. The buyer has $30k for a down payment. But can only qualify for 170k in bank financing. So is short $50k to purchase.

This is pretty easy: The buyer is trying to acquire more house than they're able to afford, so they need to lower their sights.

The 2008 crash, which was precipitated by exactly this kind of behaviour being enabled by financial institutions, should have been a lesson for all.

I guess some failed to learn it

My mom went through this scenario when she sold her house. The guy buying it has 2/3rds of the money on hand but was waiting for some land to sell before he had the rest.

What they did was use part of the upfront payment to payoff my mom's house so she had the deed in hand. She then basically became a mortgage holder for the buyer. He agreed to make monthly payments to her until he paid off the balance.

He bought the house as a flip so he's been renovating it and paying her off at the same time. So far it has worked out but he is the son of an old family friend.

Not sure I would have been comfortable otherwise.

quote:

Originally posted by Scurvy:
What they did was use part of the upfront payment to payoff my mom's house so she had the deed in hand. She then basically became a mortgage holder for the buyer. He agreed to make monthly payments to her until he paid off the balance.

Sounds like a land contract. The seller holds the deed and is the mortgagee. IANAL, but I understand that, in a land contract, if the buyer defaults the home title rights automatically revert to the seller and the buyer is out the entire sum of their investment in the property.

Thanks guys. I appreciate the thoughts. The condescending comments, not so much.

Just thinking through a potential scenario that is a small part of a bigger pix.

Thanks again.

I'm assuming for purposes of this that the seller's separate agreement with the buyer is documented by a note and secured by a mortgage on the property. If not, there would be another set of issues to contend with.

The seller's note and mortgage would be subordinate to the bank's, which leads to the issues referenced above. In addition:

Given the facts you've presented, the bank isn't going to agree to this arrangement because they have already determined buyer cannot service the additional debt. That means buyer will have to lie to the bank when taking out his loan. In doing so he will be committing fraud (likely on an FDIC insured institution) and the seller would be aiding and abetting the fraud. Buyer would also be in default of his loan covenants from day one.

Seller would be better off financing the entire purchase price through a note and mortgage than participating in this arrangement.

quote:

Originally posted by ensigmatic:

quote:

Originally posted by Scurvy:
What they did was use part of the upfront payment to payoff my mom's house so she had the deed in hand. She then basically became a mortgage holder for the buyer. He agreed to make monthly payments to her until he paid off the balance.

Sounds like a land contract. The seller holds the deed and is the mortgagee. IANAL, but I understand that, in a land contract, if the buyer defaults the home title rights automatically revert to the seller and the buyer is out the entire sum of their investment in the property.

That was my understanding. If he stops payments my mom can take the house back and he's out everything.

Many are assuming that the bank isn’t qualifying the buyer based on his financial situation. Is it possible that it’s due to the appraised value of the property?

quote:

Originally posted by a1abdj:
Many are assuming that the bank isn’t qualifying the buyer based on his financial situation. Is it possible that it’s due to the appraised value of the property?

It's loan to value. Buyer needs more loan than he can afford and bank doesn't want that equity position. Again, go with PMI. This situation is why it exists. I don't know if 80-10-10 or 80-15-5 loans still exist, but if so they'd be another option.

Perhaps steer him to a USDA Rural Development loan depending on the location. Almost 100% financing LTV if he qualifies.

Otherwise, you are essentially doing a second mortgage.

If you do this most likely you will lose your money.

Under today's guidelines you only need 3 to 3.50% down payment to qualify for a loan.

They are putting up 12% and still can't carry the full loan.

They bank is telling them thy can't afford it.

The bank is right, they can't