We Purchase Homes By Taking Over The Mortgage Payments!!!
What Does It Mean To Sell Your Home “Subject To The Existing Mortgage?”
Selling your home "subject to the existing mortgage" is a transaction where the buyer purchases the house and makes payments on the existing mortgage after closing. As the new owner of the property, the buyer will now be responsible for paying the mortgage payments, the property taxes, the insurance, the HOA, and any other obligations related to the home. Selling your home "subject to the existing mortgage" is a practical option for homeowners with low equity, liens, or missed mortgage payments. As buyers using this method, we are commonly able to provide homeowners with more cash at closing than they would receive if the house were sold traditionally after accounting for realtor commissions, settlement expenses, seller concessions, required repairs, closing costs, and the remaining mortgage balance.
We serve as a viable solution for homeowners that no longer desire to continue making payments on their long-term mortgage debt. For homeowners in distress, we can help them avoid foreclosure, short sales, and bankruptcy, which are all events that would have a severely negative impact on their credit. While taking over the mortgage payments on the home, each timely payment that is made on the mortgage helps to restore and build the seller's credit.
As part of my offer to purchase your home "subject to the existing mortgage," I will agree to buy the home in "as-is" condition with no repairs needed. As a convenience to you, I will also cover all closings costs so that you have no out of pocket expenses. The closing can be set on a date that is convenient for the seller, or I can offer to lease back the property to the homeowner for either a short term or long term period. Finally, as part of our offer, we will negotiate a direct cash payment to be paid to the seller at closing based on the home’s condition, mortgage terms and equity. The purchase price of the home will be calculated as follows: (Unpaid Mortgage Balance) + (Cash Payment) = Total Sale Price
Sales Price Example: $150,000 (unpaid mortgage balance) + $10,000 (cash payment paid to seller at closing) = $160,000 Sale Price
In Which Scenarios Should A Homeowner Consider Selling Their Home Subject To The Existing Mortgage?
Selling your home subject to the existing mortgage remaining in place is a viable option under the following circumstances:
*Homeowners with no or low equity where they would have to bring cash to closing, or would receive minimal cash at closing after paying all closing costs, realtor commissions, required repairs and settlement expenses
*Homeowners who are behind on mortgage payments or facing foreclosure
*Homes requiring extensive repairs that would not pass a traditional inspection
*Homeowners who need to close quickly in order to receive cash fast
*Homes with high days on market where the seller is experiencing rising costs and expenses
*Homes with unpaid liens (federal, state, child support, HOA) or other debt obligations (solar panels, water softeners, plumbing, etc.)
Is Buying & Selling Real Estate “Subject To The Existing Mortgage” Legal In Texas?
Texas property code section 5.016 allows homeowners to sell their home with an existing lien or mortgage that will not be paid off in full at closing, provided that they supply the new buyer of the home with a disclosure pertaining to the lien or mortgage’s terms; unpaid balance amount, interest rate, and monthly payment amount. In this regard, we will request that the homeowner provide us with a copy of the most recent mortgage statement so that we can complete this required disclosure document and include it in our offer. A copy of the 5.016 disclosure can be downloaded here for your reference: 5.016 Disclosure
Can The Seller Obtain Another Mortgage With This Loan Still In Their Name?
After we can show that we have been making the mortgage payments for a minimum period of 6-12 months on the seller's behalf, lenders will then be able to classify this current mortgage payment as being "offset," and the present mortgage will not be counted against the seller's debt to income ratio. Sellers will then simply have to meet the remaining underwriting requirements pertaining to employment verification, credit score, debt to income ratio, down payment requirements, etc. Sellers are encouraged to become familiar the criteria to obtain a 2nd FHA loan if the existing loan is an FHA mortgage, along with discovering the other available mortgage loans with low down payment options to include Fannie Mae HomeReady Loans, Freddie Mac Home Possible Loans, and USDA loans.
If the homeowner has a VA loan, the sellers will still be able to qualify for a 2nd VA loan depending on their remaining entitlement, and the purchase price of the 2nd home. In San Antonio, the total VA loan entitlement amount is presently $548,250. After subcontracting the unpaid principal balance of the existing mortgage from this total entitlement, the homeowner will have the remaining VA entitlement balance available to pursue a 2nd VA loan. The benefit of obtaining a 2nd VA loan is that there will be no down payment or a minimal down payment amount (less than FHA and Conventional), without being charged for mortgage insurance. The requirement is that the 2nd VA loan must be above $144,001.
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.
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 us. In this regard, we offer the following protections/safeguards:
*Our commitment is to ensure that the underlying mortgage payment is paid each month by no later than the 10th 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.
*To further protect the seller’s interests, we will provide the seller with a deed of trust at closing which will allow them to recover the property through a “non-judicial” foreclosure if the buyer defaults on the terms of the mortgage. With this expedited ability to recover the property in a short time frame (30-45 days), the seller would be able to regain the deed and ownership to the home in a timely manner without extensive damage to their credit score.
*As the buyer purchasing the home subject to the existing mortgage, we maintain a line of credit over $100k, a savings account of over $100k, multiple properties owned free and clear that we can borrow against, and even an active life insurance policy to ensure that we are able to meet our financial obligations pertaining to the payment of the seller's mortgage until it is fully paid off. Our secure financial position enables us to continue to meet our financial responsibilities towards the seller's underlying mortgage payment even in instances where we do not receive monthly payments from our tenants or buyers.
To date, we affirm and assert that we have never missed a mortgage payment on behalf of a seller, neither have any foreclosure proceedings ever been initiated against us from a previous homeowner because of our default.
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.
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.
What Documents Are Used In Making An Offer?
We use the following documents to prepare our offer when buying property subject to the existing mortgage:
*Subject To Purchase Agreement
*Section 5.016 Notice (as described above)
*Authorization To Release Information (used if we need to obtain the mortgage reinstatement or payoff amount)
*1099-S Exemption Form (used to determine if home was used by seller as their primary residence to exempt the proceeds of the sale from taxes).
*Seller Information Sheet
A copy of the documents used in our offer can be downloaded and reviewed by accessing this link: Subject To Offer Package
Once these documents are completed and executed, this package, along with a copy of the seller’s most recent mortgage statement, are provided to a real estate attorney to begin the title search, and to prepare the closing documents to complete the sale of the home.
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. Below is the contact information of the intermediary real estate attorney that prepares the closing documents and handles the closing process:
Mrs. Allison Tipton, Attorney | Tipton Law Firm
1603 Babcock Rd. Ste. 118, San Antonio, Texas 78229
What Documents Are Prepared & Executed At Closing?
Below is an overview/summary of the documents that are prepared and executed at a closing when buying and selling real estate subject to the existing mortgage remaining in place:
- Section 5.016 disclosure (if not received during the offer/contract period)
- Other closing disclosures prepared for the benefit of the buyer and seller
- Intermediary agreement-disclosing that the real estate attorney does not represent either party
- Limited power of attorney (allowing the buyer to communicate with the lender on the loan)
- Transfer of escrow funds and hazard insurance policy
- Deed of Trust (to protect the seller's interests)
- Special Warranty Deed subject to indebtedness (transferring ownership from the seller to the trust)
- Trust agreement
- Transfer of beneficial interest in the trust
CONCLUSION - LET US BE YOUR GO TO RESOURCE!
I would love to be a resource to homeowners seeking to sell their home without the expenses, requirements, and inconveniences of a traditional sale. As a convenience to the seller, I will agree to cover all closings costs, and I will commit to purchasing the property in “as-is” condition with no repairs required. We can typically finalize the transaction to include catching up any back payments and/or providing the homeowner with direct cash within 3-10 days after the offer is signed at closing. Please feel free to contact me if you have any questions, or if you’d like an offer on your home, and I’d be more than glad to assist. I look forward to building a relationship with you!
Sincerely Yours In Service,
Mr. Aaron C. Sams, USAF Vet.
President - Sams Realty Group LLC
The Mortgage Takeover Team
Licensed Real Estate Agent (Texas)
Licensed Life, Health, Property & Casualty Insurance Agent (Texas)
Certified Mediator (Texas)
Registered Mortgage Loan Originator - Texas
4063 East Houston St
San Antonio TX 78220
Phone: (210) 788-1034
Fax: (210) 855-3939