How to properly transfer title?

Question

So I hope I get this in the right forum - I have a friend who is looking to take over payments from a seller on a SFR and take title (seller just wants to effectively give the house away as long as the new owner takes over the payments).  The outstanding loan amount is $160k and the property is worth more than that (this info is not really pertinent to the question).

The question is: what is the best/safest way to do the transfer without spending more money than necessary?  Is a quit claim deed the way to go?  Would this be done via a title company, escrow company?  Is there a ballpark fee that is reasonable for this service?  Would it make sense to purchase title insurance?  Are any specific disclosures needed in the contract from a liability stand point since he is taking over payments?

Those are the questions I can think of.  His plan is to refinance the property within a couple months (the equity is there and the current rate on the loan is 7% so a refinance would make sense).

Another option is to finance it at the time of transfer/purchase with a purchase loan (to payoff the existing mortgage).  Do the rates for purchase loans and refinance loans differ?  and is it harder to refinance than get a purchase loan?  If he gets a purchase loan, will that complicate the purchase process more (i.e. make it more expensive) than if a simple title transfer is done?

I apologize for so many questions, hopefully I don't confuse you guys too much :)

Sergey Tkachev · Answer

@Colin  Murphy - thanks for the quick reply

Bill Gulley - thanks so much for the detailed response.  Yes, I haven't dealt with this specific situation, that's why I'm asking so many q's :).

Just to clarify a couple things, I don't think I mentioned that the property is in California.  My friend plans to live in this house as his personal residence and the current owner is someone that he knows.  So he is not planning to resell it, owner finance it, etc.  The current owner just doesn't want the house and is willing to have him to take over the payments.  So there is less of that issue of liability and potential problems as would be if this was the usual scenario with a takeover of payments and owner financing it to another buyer - that is not the case here.

The main question is how to best transfer the title, and Bill, you gave a pretty in-depth answer, thank you, I really appreciate it!  The only downside to purchasing it as a straight sale and get purchase financing would be that it would probably require cash from the purchaser - it would either be sold for above the current outstanding loan amount (and require a downpayment) so that the new loan would be a certain % of the purchase price, or as you mentioned, pay down the existing loan with cash during purchase so that the new loan is less and conforms to the LTV requirements of the lender.  And I'm assuming the same is true if payments are taken over and just a refinance is done after the fact, since the lender will be viewing the $160 as the purchase price?

I agree regarding talking to an attorney, that was in my plans, I just wanted to throw this out there on the forums and get a sense of direction from others who have experience in this so I know where to best direct him.  Thanks again!  If anyone has something to ad, that would be great!

Sergey Tkachev · Answer

Awesome, thanks again!

Bill Gulley · Answer

As I mentioned, a refi will have the same issues. An option with a lease might be better until the buyer can actually buy. Good luck with it and with your attorney. BTW, read up on the seller financing issues as Dodd Frank may apply, depends on how long the owner has been out in some cases. :)

Bill Gulley · Answer

Sergey, I'll address you questions, but first Colin post something that carries serious issues. I see Colin is rather new here and probably wasn't aware of the forum controversy over that podcast. I thought the podcast had been removed.

The short of it, the information given implies doing things that are extremely predatory and illegal. These aspects were pointed out and Mr. Kemp soon afterward hasn't grazed his fingers over any keyboard posting here since to my knowledge, he took the exit door. By his own admission, he didn't have any formal training in finance other than that required for a loan originator.

A RMLO (mortgage originator) is required to take a 20 hour class and a 100 question exam, about as in depth as a real estate agents license as to laws pertaining to mortgage originations. These classes do not teach underwriting techniques other than teaching prequalification aspects and certainly nothing about anticipations to future qualifications applicable to seller financed transactions.

Do not do anything suggested in #70 podcast.

Sergey, this should be a straight purchase sale if the buyer has money for a down payment and qualifies for a new loan, that's the simple way, go the conventional way before trying to be creative if you can.

If you can't, then get more creative. This could be a subject to transaction. You need a contract to buy at the loan amount, the seller needs to get a loan payoff so that you can compute the interest to the day of settlement to be used as the sale price. You will need a form HUD 1 prepared. The seller will execute a Special Warranty Deed that grants title but it will list the existing loan as being excepted out. That means the seller gives title subject to the buyer's performance in paying the loan due. If the buyer doesn't pay, the seller isn't guaranteeing the good title as to anything about that lien, he isn't responsible to the buyer.

The buyer is responsible to clear that lien.

As to refinancing, that loan is based on the sale price or appraised value, which ever is lower, in this case the sale price. That means the borrower will need to pay down the loan to refinance as if he were buying in a purchase transaction in reality, might as well do a purchase.

Do not use a Quit Claim deed, that should not be used in a matter like this.

A subject to type transaction is a violation of the due on sale clause in the seller's mortgage, it is a risk that the lender will call the loan due and the buyer will then need to refinance (or sell) under a time frame or risk foreclosure.

Look to lease-options as well. The buyer can use an option to buy and save for the down payment to purchase at a later date, the lease gives possession. A lease longer than 3 years also violates the due on sale but is less likely to surface to the lender's knowledge, but could.

Obviously your questions reflect your level of knowledge, not being condescending just sounds like you're really new. Any title company doing a sub-to will want the seller's lender notified in most cases, consider that. You really need an attorney to advise your friend, I'm not seeing you being in a position to walk this deal through to settlement. We may get others that jump on this to be in a mentor position to assist, they usually don't do things for nothing and you'll still need an attorney or closing agent, so just get to a real estate attorney! Good luck :)

Colin G Murphy · Answer

Hi @Sergey Tkachev

It sounds like you need to do some research on subject to loans. Podcast 70 with Grant Kemp discussed the topic in detail as have many forums & blogs over the years.

What your friend is trying is certainly doable, but bear in mind that this is a more complex transaction and isn´t recommended for newbies.