Call Toll Free: 1-866-Swift-Source
Alternate Tel: (858) 405-5620

Welcome to First-Time Homebuyer Heaven


Your Best Provider of Real Estate and Financing Services For The Purchase Of Your First Home

Ask Me A Question
 Apply Online
 

 Home
 Assistance Programs
 Quick Qualifying Chart
Calculate Tax Benefits
 My Promise To You
 My Closing Cost Guarantee
 Safe Loan Types
 Unsafe Loan Types
Home Buying Processs Homebuyer Misconceptions
 Credit and Credit Issues
 Closing Costs Explanation
Tax Advantages of Owning
Useful Free Reports
Meet Your Team
 Map of San Diego County
Contact Information

 


 

 

 


 

 

 

Three Commonly Used Creative Finance Techniques By First Time Home Buyers


Current market conditions have created difficult times for buyers and sellers alike. Housing prices have fallen in many markets leaving many homeowners owing more to the bank than their properties are worth. Some of these home owners are highly motivated to sell for various reasons such as job transfer or a large jump in payments when their adjustable rates began adjusting. Buyers have been hit equally hard. The subprime meltdown has caused lenders to dramatically raise credit standards. Many potential first time home buyers have been locked out of the market during the last six months.  

Creative financing techniques are starting to become more popular alternatives to allow sellers who are slightly “underwater” to sell without ruining their credit and to allow first time buyers who have been recently locked out of the market to buy. Sometimes it is in the home owner’s interest to simply walk away from the property. This might be true if the amount owed is significantly more than the market value and all of the financing in place is still “purchase money.” Lenders have no judicial recourse available to recover against mortgage debt that was used to purchase a property. Lenders however can apply judicial recourse to remedy delinquent mortgage debt that resulted from a refinance. Judicial recourse would allow a lender to attach liens against other assets of the home owner. This cannot be done if all of the mortgage debt currently in place was used to purchase the property.   

The three common creative financing techniques that will be discussed here are the short sale, the “subject to” sale, and the lease option sale. We will briefly discuss the pros and cons of each, the most suitable situations for each, and also some of the specific points of implementation of each. 

The short sale can occur when a seller has to sell a property that has a current market value of less than is owed to the lender. The lender has agreed to accept proceeds of a sale at a certain price point established by the lender that is less than the current mortgage balance. Sellers who are “underwater” (owing more to the bank than the home is worth) prefer this option over lender foreclosure because it leaves their credit intact. A short sale does not leave a black mark on credit. 

In the case that the property’s market value exceeds the mortgage balance by only a small amount, the short sale might be a viable alternative for both the lender and the home owner. The lender will always choose the option that it feels will produce the greatest return. A big part of applying for a short sale is to convince the lender that the short sale will provide the greatest return to the lender of all available options. 

The short sale can occur when a seller has to sell a property that has a current market value of less than is owed to the lender. The lender has agreed to accept proceeds of a sale at a certain price point established by the lender that is less than the current mortgage balance. Sellers who are “underwater” (owing more to the bank than the home is worth) prefer this option over lender foreclosure because it leaves their credit intact. A short sale does not leave a black mark on credit. 

There are some downsides of a short sale for both the seller and buyer. On the seller’s end, the seller will receive a 1099-C from the lender at the end of the year in which the short sale occurred. The 1099-C specifies the amount of debt that the lender has forgiven. This amount of debt is counted as ordinary income to the seller at tax time. The lender will always send out the 1099-C because it allows the lender to write off the loss. Also, it is difficult to get a lender to agree to a short sale. Currently only a minority of short sale requests submitted are approved by the lenders. A short sale is also harder to make because the lender will often require that the real estate agents take a lower commission. Some lenders are now not actually forgiving the debt but are creating credit-card type debt for the seller to pay off later in the amount of debt that was forgiven. The hardship that is created for the buyer is the additional length of time that can be required to close a short sale. Short sales can drag on for a long time, particularly if the seller’s agent has not obtained the lender’s agreed-upon sale price in advance of listing the property. 

The “subject to” sale occurs when a buyer purchases a property “subject to” the seller’s mortgage remaining in place. In this type of a sale, title is transferred from seller to buyer but the seller’s mortgage remains in place in the name of the seller. The lender is not notified that title has been transferred and the buyer takes over the payments on the seller’s mortgage. The lender will usually have the right to enforce a “Due On Sale” provision normally included in the seller’s original note. Lenders will generally not enforce this clause and put a property in foreclosure if the payments do not become delinquent. 

A “subject to” sale can be a viable alternative for a home owner who has difficulty selling because the home’s market value is slightly less than the amount owed to the lender. It is also an excellent way for a buyer to buy that would not be able to qualify for a loan normally. For example, the buyer might have a credit score below a lender’s minimum. The seller has to protect himself by doing his own due diligence of the buyer’s creditworthiness. It is also a good idea to set up an escrow account that the buyer will make payments to. The seller can further protect himself by placing a 2nd deed of trust on the property. If the buyer become delinquent and or violates any covenants in the note, the seller can bring the 1st mortgage current and foreclose on the 2nd that he has put in place. A new fire insurance policy will need to be put in place with the buyer as the beneficiary. The seller can also just add the buyer’s name to the current policy, but this would probably alert the lender of the transfer of title. The lender is unlikely to foreclose if payments are current but it is best to avoid notifying the lender about the title transfer. When the new trust deed is recorded by the buyer, there will be a reassessment of property taxes. If an impound account has been established, the lender would receive notification of the tax reassessment and title transfer. The lender will send the 1098 to the previous owner but now only the new owner can take the interest deduction. Tax law allows only the person who is on title to take the deduction. 

Typically the “subject to” sale is only viable if the buyer has at least $10,000 available for down payment. This money will be used to pay real estate agent commissions. There is often not enough money to pay commissions of two agents. The seller’s agent is often the one works with the buyer as well. There will normally not be a buyer’s agent in a “subject to” sale.  

The lease option is also a good choice for a buyer that would not be able to qualify to purchase a home and believes that local home prices will rise. During the “lease option” sale, the potential buyer purchases an option to buy the property at a set price during a specified time frame. The potential buyer then leases the property until he either decides to exercise the option or the option expires. The option’s purchase price will be applied toward the property’s sale price if the potential buyer exercises the right to buy. Normally the rent paid by the lessee will be higher than market rents, but this additional rent will go toward the purchase price should the lessee exercise the right to buy. The three most important forms in a lease option transaction are the option agreement, the purchase agreement, and the lease agreement which ties together the option and the purchase. 

The lease option gives the seller more protection that the “subject to” sale because no title is transferred until the actual purchase is made. The potential buyer will normally have to pay the seller at least $10,000 at the beginning of the transaction. This money will pay for the price of the option, the initial deposit on the purchase agreement, the security deposit for the lease, and the real estate salesperson’s commission. There will be only one real estate agent normally involved with a lease option transaction.

 

 

 

First Time Buyer Books

Realty Investor Books

Find An Affordable Home!
 

 Apply Online


Ask Me A Question
 

Here Is An Invitation to My Next Learning Annex Class On First-Time Homebuyer Financial Assistance


Check Out The Latest News In First-Time Homebuyer Financing

 

Brought To You By
Mark Harmon, Realtor
®
CalHFA Preferred Loan Officer
USA Realty and Loans

Brokerage Main Office
3994 Carson St.
San Diego, CA 92117