Question: Scott, I am looking at a house for sale by owner and the home is assessed by the county assessor at $50,000, the owner said to me, if you qualify you can assume my payments, she owns $30,000. Does that matter to the lending institution if I assume the loan and rent the property? Or what would be the best way to go about this? The lady still lives in the home, consequently it could be rented immediately.
How would you as experienced investor go about it? Which issues do I have to be careful about? Do you have any forms or contracts that you recommend I should use?
Answer: Assuming a real estate loan is the process of taking over the existing financing when purchasing the property with the lender’s approval.
The type of loan that your seller has makes all the difference in the world. If it is an FHA or VA loan, the first question to ask is “when was the loan initiated? Any loan written prior to 1989 were assumable without qualifying, whether they were FHA, VA, or conventional. Since then, the rules have changed. If the loan was written after 1989, conventional loans are generally not assumable. However, FHA and VA loans are generally assumable if you qualify.
To determine if you can assume the loan as a landlord who does not plan on living in the property, I suggest you get a copy of the mortgage and take a look at the clause pertaining to loan assumption.
Suppose you find that you can’t qualify to assume the loan but you still want the house. You could also buy the property subject to the existing financing.
When buying a property subject to, you are not getting the lender’s permission to buy the property. You a just taking the over the payments of the existing financing. Banks aren’t crazy about people just taking over their loans, but the fact is that they rarely learn of the transaction (unless you tell them). And as long as the payment gets made, they usually could care less who’s making it.
It looks as if you have some equity in the property, so buying it subject to the existing financing might be an excellent way to buy to get this property. If I were buying the property, I would only buy it subject to. I would not pay the seller much for their equity if the figures you gave me were accurate (somewhere close to $1,000).
As for forms and contracts, the first one you’ll need is a sales and purchase agreement. You can definitely use the one you got through Wealth School. Or, you can use the State contract (the one realtor’s use).
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March 17th, 2010 at 6:50 pm
More from on the question I got from my email:
“Also, if I go forward with this project, I make a sales contract with this lady and she would give me the title, is that correct? Does she have to sign it in form of a notary? Also, would I just make the loan payments myself; would the mortgage company not be suspicious when all of a sudden payments come with a different name????”
Answer: Yes, you will first do a sales and purchase agreement.
If you are going to assume the loan, you’re next move would be to do the closing…I’m assuming you will ask a title company to help you in that regard.
If you are going to buy the property subject to the existing financing, you may not want to do the closing at a title company. Contact me about that if you need some guidance in that regard.
If you buy it subject to, yes, you will be the one making the payments directly to the bank. Don’t worry, they’ll take your money.
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