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 the possible 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
actually 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 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 or
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 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 knowledgeable review your work.
http://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.
Sincerely,
Tim Randle
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