Pay off existing loan to close on property for seller financing

Creative Real Estate Financing
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Pay off existing loan to close on property for seller financing

Luke Edwards
Raleigh, NC · Member since 2021 · 7 posts · 1 vote

Hi,

Sourcing my creative finance people for some advice here for a begginer real estate investor. I would like to go forward with the seller financing route if I am able to get this property under contract for favorable terms for me. The house appears to have an existing loan on it. Does that have to be paid off at closing? How have you all delt with situations where you seller finance a property with an existing loan on it?

The seller is open to seller financing but I am trying to figure out how I can structure the financing and if that loan will need to be paid off at closing for the title to transfer.

Deal Details: 

Est. Left on Loan: $175K (Maturity 2/14/52: 3.55% Interest Rate) with monthly payments $835

ARV: $275k

List Price: $271K

Rehab Needed: $15k

Let me know if you need any other details. 

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  • Ty CouttsBusiness Member
    Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes
    2y

    Hi, Luke Edwards. Seller financing can be a great way to acquire property, especially if the seller is open to it and favorable terms can be negotiated. I would consider these possible strategies. 

    Subject-To Financing:

    Definition: In a subject-to deal, the buyer takes over the existing mortgage payments without formally assuming the loan. The mortgage remains in the seller’s name, but the buyer gains ownership of the property and makes the payments.
    Risk: This can trigger the Due on Sale Clause, so it’s essential to understand the risks and have a plan in place if the lender calls the loan due.

    Wraparound Mortgage (All-Inclusive Trust Deed - AITD):

    Definition: A wraparound mortgage involves creating a new mortgage that "wraps around" the existing one. The buyer makes payments to the seller, who in turn continues making payments on the original loan.
    Structure: The new loan is typically for the full purchase price, minus any down payment. The seller benefits from the spread between the interest rates of the old and new loans.
    Agreement: Ensure a clear agreement on who will be responsible for the existing mortgage payments and how any arrears or defaults will be handled.

    Seller Second Mortgage:

    Structure: The buyer gets a new first mortgage to pay off the existing loan and a second mortgage held by the seller for the remaining balance.
    Consideration: This may require refinancing the existing loan, which can be costly and may change the loan terms.

    I hope this helped. I am here to chat as I am more than happy to inform people on the industry. Please schedule a time below to chat below if you have any questions you would like answered on a call.

    https://calendly.com/tycoutts

    [email protected]719-641-5169
    Ty Coutts - Aslan Home Lending 543 Reviews
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  • Luke Edwards
    OP
    Raleigh, NC · Member since 2021 · 7 posts · 1 vote
    2y
    Quote from @Ty Coutts:

    Hi, Luke Edwards. Seller financing can be a great way to acquire property, especially if the seller is open to it and favorable terms can be negotiated. I would consider these possible strategies. 

    Subject-To Financing:

    Definition: In a subject-to deal, the buyer takes over the existing mortgage payments without formally assuming the loan. The mortgage remains in the seller’s name, but the buyer gains ownership of the property and makes the payments.
    Risk: This can trigger the Due on Sale Clause, so it’s essential to understand the risks and have a plan in place if the lender calls the loan due.

    Wraparound Mortgage (All-Inclusive Trust Deed - AITD):

    Definition: A wraparound mortgage involves creating a new mortgage that "wraps around" the existing one. The buyer makes payments to the seller, who in turn continues making payments on the original loan.
    Structure: The new loan is typically for the full purchase price, minus any down payment. The seller benefits from the spread between the interest rates of the old and new loans.
    Agreement: Ensure a clear agreement on who will be responsible for the existing mortgage payments and how any arrears or defaults will be handled.

    Seller Second Mortgage:

    Structure: The buyer gets a new first mortgage to pay off the existing loan and a second mortgage held by the seller for the remaining balance.
    Consideration: This may require refinancing the existing loan, which can be costly and may change the loan terms.

    I hope this helped. I am here to chat as I am more than happy to inform people on the industry. Please schedule a time below to chat below if you have any questions you would like answered on a call.

    https://calendly.com/tycoutts


     Thank you for the super quick insights here. I just set up some for tomorrow to talk through some further questions. Specifically around how receptive sellers are to subject-to and the likelihood of the lender calling the loan. Looking forward to connecting

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