Question: “I have a seller with a property that has a mortgage. I don’t have a way to borrow money to buy the house. Can I just take over the payments on owner’s mortgage?”
Answer: “The answer is maybe. The most important thing is whether or not the seller is willing to allow you to do that.
If you take over the payments on the loan, the seller will still be legally responsible for the debt.
You will almost certainly not be assuming the loan. Loan assumption are a situation in which the lender gives you permission to assume the loan. If the loan was written after 1989 through some type of lending institution other than a private individual, you will not be allowed to assume the loan. At that time, institutional lenders like banks and mortgage companies stopped doing loan assumptions.
If the seller is willing to let you do it, you can buy the property subject to the existing mortgage.
Buying a property subject to the existing mortgage is taking over payments of the mortgage. In other words, you don’t pay off the mortgage. It is different than assuming the loan because you aren’t getting formal authorization from the lender to assume the loan.
How good is the loan in place? You ONLY want to use this method of purchasing a property when the loan is very good. It needs to be low interest (less than 8%, preferably less). Many times, these loans are amortized over 30 years.
If you are going to take over a loan in this manner, you need to follow your criteria in terms of what type of offer you make. Buy the property with built-in equity (go to www.replaceyourpaychecknow.com for more information on how to do that).
Another big advantage of taking a property subject to the existing mortgage is that you don’t sign personally for the loan. That doesn’t mean if get into the deal you are going to let the property go back to the lender.
If you are going to buy a house subject to the existing mortgage, the house needs to be in good condition. If it needs more than carpet and paint, it’s probably too much of a fixer upper. Sometimes you even find a move-in ready house.
Buying a property subject to the existing mortgage is an easier sale to a homeowner who more needs to sell (not wants to sell) a property. Usually, they are either behind on payments or about to be behind on payments, or perhaps they need to move out of state. For whatever reason, they just want out from the responsibility of the property.
For example, I bought a house worth $75,000 subject to the existing mortgage of $55,000. It was an FHA mortgage with a 6% interest rate. We sold the property on lease option ($75,000) for $650 per month and $1,995 down. The payment was enough to cover the mortgage payment and get a good positive cash flow. The buyer later got his own FHA loan and purchased the property. That was a nice $20,000 pay day!
The beautiful thing about this type of deal is that the only work it needed was steam cleaning the carpets and touch up painting. We paid the seller nothing, and the payments were current on the mortgage.
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