Curious About Creative Financing?

With rates being what they are these days we are seeing more and more inquiries about
creative financing methods so this month we will discuss some of the more common methods.

In an assumption the buyer takes over the existing loan that the seller has. The rate and payment terms do not change and the buyer essentially steps into the shoes of the seller for payment of the outstanding balance.

The seller’s current lender generally must approve the assumption before it can be done and typically the lender will have closing documents that need to be signed by both buyer and seller. For that reason an assumption requires participation and approval by the seller’s existing lender. It is also important to note that the Deed of Trust that is filed in favor of the lender will be a Schedule B exception in the Owner’s Title Policy since it is not being paid in full at closing, but instead is being assumed by the buyer.

It’s noteworthy that not all types of liens are liens that can be assumed by the buyer so before an agent representing a buyer makes an offer that includes an assumption it’s a good idea to make sure the seller’s lien type is assumable.

A wrap transaction involves a transaction where the seller’s existing lien is left in place and is not paid as part of the transaction. The buyer then signs a new Deed of Trust in favor of the seller and that new lien essentially wraps around the existing lien.

Let’s look at an example:
Seller has a loan to Chase for $525,000. He got this lien when he purchased the property in 2019.

The new sales price is going to be $650,000 and the buyer is going to put down a $100,000 down payment. At closing Buyer will sign a second Deed of Trust showing the seller as the lender for $550,000. This new Deed of Trust is technically in a second lien position as far as the first lender is concerned and that first lien must continue to be paid to avoid foreclosure.

The wraparound mortgage allows the seller to maintain their existing mortgage while the buyer’s mortgage “wraps” around the existing amount owed. While the exact structure is negotiable, generally the buyer makes their payment to the seller and the seller in turns pays their original first lien.

With a wrap transaction the existing Deed of Trust is also shown as a Schedule B exception in the buyer’s title policy.

Seller Finance
In a seller finance transaction the seller becomes the buyer’s lender for the purchase. Essentially instead of funding the full amount of the sales proceeds to the seller the lien amount is held back from closing and applies to the purchase price as a loan. At closing the seller will execute the typical warranty deed that conveys title. Title transfers to the buyer at closing and the buyer also signs a Promissory Note and Deed of Trust to evidence the lien amount that they will pay over time to the seller. This method allows the parties to negotiate the interest rates, decide what the payment terms are and permits the buyer to pay the sales price over time instead of all at once.

Have more questions? We have answers! All three of these financing methods have different questions that can come up during the negotiation and closing process. Working with a knowledgeable title company is the key to success! The best thing a realtor can do is select a closing team at Texas National Title because we are the experts that you need! Give me a call if you’d like to discuss these types of financing more.

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