Take Over Payments
Take over payments refers to a strategy used to buy real estate with no money down. Assuming home mortgage loan payments is a relatively common practice amongst real estate investors, but individual buyers can participate in this home buying strategy as well.
Take over payments is known as Subject To and involves transferring property rights while leaving the loan intact. The property rights are 'subject to' fulfillment of the contract. One crucial aspect of Subject To sales is most mortgage loans include a 'due on sale' clause which grants banks the right to demand payment in full when property is sold.
Most banks do not call loans due as long as mortgage payments are paid on time and in full. However, buyers should consult with a real estate professional to ensure they are in compliance with state law.
Subject To transactions require a level of trust between buyers and sellers. Since loan documents remain in the original buyer's name they assume considerable risk if the buyer defaults on future loan installments.
Sellers facing foreclosure sometimes seek out buyers or investors to take over payments and cure mortgage arrears. Buyers assuming mortgage payments on foreclosure homes must conduct due diligence to determine the current market value of the home. If property owners are upside-down on their loan and owe more than the home is worth, taking over payments may not be a wise financial choice.
Another option for taking over payments is through an assumable mortgage. This type of mortgage allows buyers to take over the home loan with lender approval. Assumable mortgages work differently than subject to contracts. Much depends on the amount of the mortgage note being taken over.
If the seller has financed $150,000, but is selling the home for $170,000 buyers must pay the $20,000 difference. Unless buyers can pay the difference with cash, they will need to take out another loan.
Depending on the buyer's credit rating, they may have to take out a high-interest loan to cover the difference. Additionally, lenders have the right to alter the terms of the assumable mortgage depending on the buyer's credit rating. Buyers may be required to pay a higher rate of interest or provide a down payment to assume the loan.
Just as with subject to contracts, sellers can be held liable if buyers default on loan payments. However, with assumable mortgages sellers can release their liability in writing to prevent them from being held financially responsible if loan default occurs.
The primary reason buyers take over payments is to obtain lower interest rates. Buyers should take time to learn the pros and cons of assuming a mortgage and determine if this type of activity is allowed.
The best types of mortgage loans to assume payments are FHA and VA loans. Anyone can assume these loans without meeting specific criteria if loans originated prior to certain dates. The assumable cut-off date for FHA loans is December 14, 1989 and March 1, 1988 for VA loans.
These are just a few ways to take over payments for mortgage loans. We invite you to learn more about subject to and other types of creative financing strategies in our real estate and home buying article library. New articles are added weekly, so take a moment to subscribe to our mailing list to stay abreast of current real estate trends.
Published on November 03, 2010 at 02:09 AM | Comments: 2