With the Real Estate Market changing over the past 6-months and really shifting from sellers to buyers holding the leverage, many creative practices that were once popular are starting to come back around. Today we take a quick look into some of these options.
1 – Loan Assumption
We are starting to field more questions about loan assumptions and this is largely due to existing loans having a significantly lower interest rate than qualifying for new financing right now. Most existing VA & FHA loans are ‘assumable’, but that doesn’t always mean its possible. Typically the new potential buyer will need to still qualify through the lender and then they have to make up the gap difference between existing loan balance and the purchase price. That can be done with cash out of pocket or possibly obtaining a second loan from another source.
Also, with an existing VA loan, that could take away from the client’s VA Eligibility to go buy another home with VA Financing until that original loan was paid off.
2 – ARM (Adjustable Rate Mortgage)
Many might hear “adjustable rate mortgage” and immediately think of darker times 15-years ago, but that doesn’t always have to be the case. These are loans where the interest rate will adjust over time based upon the market. Typically they will start out with a lower rate and adjust upward, but that secondary period can ebb and flow. The initial period for a fixed rate is normally 3, 5 or 7 years.
We generally see the ‘big banks’ with these types of loan products versus a mortgage broker/banker. They can be risky or they can pay off if you’re able to refinance the loan into a lower fixed rate prior to the adjustment period. These often may also carry a prepayment penalty so one needs to factor in that potential cost as well.
3 – Seller Carryback
Long popular with land sales and on some commercial transactions, they can trickle over into residential too. I, personally, have bought multiple properties with the seller carrying the note for a while. What this means is that a seller has equity and instead of cashing out at closing, they become the lender. Oftentimes they can charge a little higher than normal market interest rate and a balloon payment to pay off the balance will be due in 3-10 years. This gives the buyer some time to figure out a long-term solution. In the meantime, the seller earns interest on their equity and if the buyer defaults, they can take the property back.
Usually the buyer is not subject to qualification, but will be required to provide a decent down payment amount. There can be a 3rd party servicer involved to handle the accounting and payment collection, for a monthly fee.
The buyer takes title to the property at closing.
4 – Loan Wrap Around (“Wrap”)
Wraps are a form of owner financing where the existing loan remains in place and the buyer pays that along with another part to the seller for the difference between loan balance and purchase price.
Here is an example:
Let’s say that John has an $80,000 mortgage outstanding on his home with a fixed interest rate of 4%. He agrees to sell the home to Sally for $120,000, who puts 10% down and borrows the remainder, or $108,000, at a rate of 7%. John earns 7% on $28,000 (the difference between $108,000 and the $80,000 he still owes), plus the difference between 7% and 4% (i.e. 3%) on the balance of $80,000 mortgage.
These can be risky for the seller.
5 – Agreement of Sale
Unlike a Seller-Carryback situation, the new buyer does not take title to the property until after the seller receives all funds, which could take years.
Here is an example:
James wants to sell his house, owns it free and clear and doesn’t need all the money right now. Jacob is interested in buying the home, but he doesn’t have the entire amount of James’ sale price, while also having issues getting a mortgage.
To get the home sold, James writes an agreement of sale, outlining the transaction, including the purchase price. He keeps the deed to the property while Jacob makes monthly payments and once Jacob has paid off the amount listed in the agreement, James will transfer the deed (ownership) of the house to Jacob.
6 – Interest Rate Buy Down
Probably the most common of the bunch right now, we are seeing buyers bring in extra funds and sellers kicking in concessions to allow for mortgage interest rate buy downs to occur. There are buy-downs where the interest rate will remain fixed at a lower than market rate for the entire duration of the loan (for a cost) and also some other variations including a 2-1 buy down. That is where the interest rate is 2% lower in year 1, 1% lower in year 2 and then adjusts back to a fixed rate for the remaining 28 years.
Cost for such will vary, but we are seeing anywhere from 1 point (1% of the loan amount) all the way up to 9% of the loan amount get paid. There usually a point of diminishing returns though. It’s always best to consult your loan officer and real estate professional to find the right fit for your situation.