How Is Closing Handled?
Our firm closes these transactions with a real estate attorney that is familiar with the legal rules and ramifications of buying real estate subject to the existing mortgage. In these transactions, we will cover all closing costs to include the attorney’s fees, and we can typically close these transactions within a 3-10 day timeframe.
What Other Risks Are Involved When Buying Or Selling Real Estate Subject To The Existing Mortgage Remaining In Place? How Do We Mitigate These Risks?
Most mortgages contain a “due on sale” clause giving the lender the right, but not the obligation, to call their mortgage loan due when the property sells or transfers from one owner to another. Under the 1982 Garn-St. Germain Act, lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses changes, the lender cannot enforce the due-on-sale clause. The same is true if the owner transfers the property to their children, if a borrower dies and the property is transferred to a relative, or if the property is transferred to a living trust and the borrower is the trust’s beneficiary.
A trust is an arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. In order to mitigate the risk of the “due on sale” clause being enforced by the lender, we will purchase the property in a trust in accordance with the 1982 Garn-St Germain Act. Under the Garn St. Germain Act, we as investors can create a trust to hold title (ownership) to real estate purchased subject to the existing mortgage remaining in place without fear of his lender calling the mortgage due and payable. There are four important elements of a trust agreement:
*Grantor: The grantor is the present owner of the real estate being placed into the trust for the benefit of the beneficiary. In the trust, the grantor provides instructions to a 3rd party, called the trustee, in regards to how and when the property held in the trust is to be provided to the beneficiary. During our transaction, the seller of the home will be listed as the grantor in the trust agreement.
*Trustee: The trustee is a 3rd party individual responsible for managing and controlling the assets or real estate in the trust. While the trustee has the power to manage the assets, their power and control is limited by the trust. As such, the trustee is only allowed to use or sell the property in the trust for the benefit of the beneficiary. During our transaction, the trustee will be a 3rd party individual designated by our firm.
*Beneficiary: The beneficiary is the person or entity that is intended to receive or benefit from the assets/real estate provided by the grantor. The beneficiary is also the person or entity for whom the trustee manages and controls the assets/real estate in the trust. During our transaction, the seller of the home will be listed as the beneficiary in the trust agreement.
*Assets/Real Estate: Last but not least, the fourth element of a trust are the assets/real estate that is transferred into the trust by the grantor. Each trust contains a legal description of the real estate provided by the grantor, which is to be managed by the trustee for the benefit of the beneficiary. During our transaction, the home being purchased will be transferred into the trust.
How Is Buying & Selling Real Estate “Subject To The Existing Mortgage Remaining In Place” Different From A Loan Assumption Or A Wrap-Around Mortgage?
Under a loan assumption, the mortgage is formally transferred into the buyer's name and the seller is no longer liable for the payments. In order to qualify to be able to assume the loan, the new buyer is required to meet the lender’s credit, employment, background, and income requirements. Recent mortgage regulations have vastly reduced the amount of assumable loans and by attrition there are very few left, if any. Buying or selling real estate subject to the existing mortgage remaining in place differs from a loan assumption in that the mortgage loan remains in the name of the seller, and the new buyer takes over the responsibility of making the mortgage payments on their behalf.
Under a wrap-around mortgage, the seller establishes a 2nd mortgage lien with the new buyer under specific payment terms that overlay the terms of the existing first mortgage lien on the property. In a wrap-around mortgage transaction, the seller acts as a lender extending owner financing credit terms to the new buyer, and the buyer signs and executes a promissory note at closing agreeing to these terms.
Buying or selling real estate subject to the existing mortgage remaining in place differs from a wrap-around mortgage in that the seller is not extending credit to the new buyer, nor is a 2nd mortgage lien created on the property. When buying and selling real estate subject to the existing mortgage remaining in place, the new buyer simply takes over the responsibility of making the mortgage payments on the 1st mortgage lien already in place, without receiving any financing or credit terms from the seller of the property.
When buying and selling real estate subject to the existing mortgage remaining in place, the lender is not involved in the transaction, nor does the seller act as a lender extending additional credit terms to the buyer. The new buyer receives the deed to the property at closing (which reflects ownership). The mortgage remains in the name of the seller, and the new buyer takes over the responsibility of making the payments each month in accordance with the established mortgage terms.
The new buyer typically receives a limited power of attorney pertaining to the mortgage at closing from the seller which enables the buyer to communicate with the lender, and to set up a method by which the monthly mortgage payments will be made. Each timely mortgage payment made by the new buyer helps to improve the seller’s credit score.
How Is The Seller’s Interests Protected To Ensure The Buyer Makes The Monthly Payments?
Since the mortgage remains in the seller’s name after closing, ensuring that the seller’s credit history and financial standing remains intact is of paramount importance to our business. Our commitment is to ensure that the underlying mortgage payment is paid each month by no later than the 15th of each month. Using a limited power of attorney received from the seller at closing, we are able to establish a connection with the lender to process the monthly payment from our bank account via ACH draft, or by processing our debit card. As each monthly mortgage payment is made, we will email or text the payment confirmation information to the seller for their reference. Additionally, the seller retains the ability after closing to call the lender, or to access their online account information, to ensure that the monthly payment was made on their behalf.
How Long Will The Loan Remain In The Seller’s Name?
As the buyer purchasing the property subject to the existing mortgage, our responsibility and obligation is to continue to pay the monthly payments on the loan until it fully amortizes and reaches its full term. There are a few scenarios that exist where the loan could be paid off earlier than this timeline. One scenario where the mortgage would be paid off prior to reaching full term would be if the property had enough equity and was sold traditionally in the future. In this instance, the income received would be used to pay off the underlying mortgage in full. Another scenario where the mortgage would be paid off prior to reaching full term would be if we elected to refinance the mortgage once the home had sufficient equity, and we could potentially secure a lower interest rate of at least 1% or more. In this instance, our lender would pay off the underlying mortgage in full. A third scenario where the mortgage would be paid off prior to reaching full term would be if we sold the home via seller financing by establishing a mortgage with a new buyer, and that buyer elected to refinance our mortgage or sell the home traditionally. In this instance, we would receive the payment that pays off our established mortgage with the buyer and use those funds to pay off the underlying mortgage in full.
It is important to note that we cannot guarantee if or when the above scenarios will occur that would lead to the underlying mortgage being paid off prior to the full term. In this regard as the buyer of the home that is purchasing the property subject to the existing mortgage, our responsibility and obligation is to continue to pay the monthly payments on the loan until it fully amortizes and reaches its full term.