How Are Subject-To Sellers Able to Qualify for New Mortgages?

Question

Hey BP, I am almost ready to present a Subject-To offer to a prospective seller and this question popped up in my mind: If the seller agrees to the deal and a couple years from now is able to buy a new property, how will the fact that it is still his name on the mortgage affect his chances of getting the new loan he needs to buy the new property?

In this specific deal I'm looking to keep the property.

Thanks for your comments!

In this specific deal I'm looking to keep the property.

Thanks for your comments!

Jay Hinrichs · Answer

This is a great question and the pro sub too camp will just gloss over it... the answer is it drastically impacts MOST folks NOT  ALL but most.. IE they cant get a loan..

so good on you to even be thinking that way....

And to further the thought process if for some reason you have a tough month or 3 and can't pay and they can't pay and they start having mortgage lates.. then they are really fubared.

Sub too is simply not worth it for most sellers far to dangerous.. UNLESS you as the buyer are strong enough to refi upon request or cut a check and pay the loan off upon request or short notice.

I know my answers and thought process is not popular with most on this site.. and I am in the vast minority.. but that's the way I feel about it.. I have seen way to many sellers absolutely screwed not understanding how dangerous this particular transaction is to them on a peronsal and financial level.

Account Closed · Answer

Account Closed I asked that same question of a local investor who's done 100+ Sub2 deals, and her explanation was:

"Property is in a trust, seller as trustor, buyer as trustee

Seller tells the new lender that the property is in a trust for estate planning purposes. Seller shows the lender the PoA & Trust Agreement, as well as documentation that the mortgage is being paid monthly (Mortgage statements etc)."

**The above is second hand information** I'm NOT vouching for its validity** See a lawyer**

If that actually works, I don't know. I disclose disclose disclose with Sub2 deals. Big bold letters in the contract, in person, and again at closing:"This transaction WILL affect your ability to obtain financing for future large purchases"

With that, I would highly suggest not keeping it for a few years. Every day you wake up, could be the day it gets called. Get on the deed, do what you need to do with it and get out. But If you're planning on keeping them long term, have MULTIPLE exit strategies1. Have enough cash / access to cash to pay it off, fast

2. Have enough equity to refi or unload it..fast

3. Have multiple lenders willing and able to refi it out, fast.

4. If you don't have enough equity, then have enough cash reserves to pay it down to 75-80% LTV so you CAN refi it out..fast.

I can't emphasize enough with Sub2 deals: Disclose disclose disclose. If it means you losing out on 10 deals, so be it. Gambling with someone else's mortgage is not something to mess around with.

Account Closed · Answer

Unfortunately that method is probably going to bite back if interest rates ever go up again. Banks will sort for any loans owned by "trusts" and check to see if the original owner is still on title. They will want to call in all low interest loans so they can lend out at a higher rate. Also, if the original seller misrepresents information on a loan ( a federal form is used  because the loan probably is eventually to be sold to Fannie Mae or Freddie Mac backed by the US Government, it could cause a legal problem for the seller they don't want to tangle with. Just be honest and most lenders will accept the regular payment of the mortgage as an offset to their debt to income ratio.

Account Closed · Answer

Account Closed In the states I do business, Arizona, Washington, Texas and California land trusts are typically legal but not used. I know they are more common in your neck of the woods.

I use an escrow company and attorney, then I have the Warranty Deed recorded. It is so rare to have a bank call a note that I don't expect it to happen.  At any rate, I don't want to be accused of fraud or "trying to hide ownership" in the event something changes.

For instance, did you know that if the seller files bankruptcy in the future you won't receive notice from the court (they don't know you own the property now) and the property becomes part of the bankruptcy estate? Anything you do outside of the court will be considered illegal. They can sell the property out from under you. Many more people file bankruptcy than banks call notes due.

Also, Title insurance and chain of Title are important to me for future selling of the property. Also, you can protect yourself by making sure the payments are made on time, (or you shouldn't be doing Subject To in the first place. If the note gets called you have time to refinance, sell the property, negotiate a new loan with the bank, use hard money to pay it off, deed it back to the seller to cure the default, etc.

Account Closed · Answer

Thank you all for the replies, really educative for me.

Account Closed great comment. What steps would you take to avoid having the bank call the note, then? My understanding was that placing the property in a land trust would be something useful (?).

Andrew Postell · Answer

Account Closed yes, depending on the bank it certainly could affect his/her qualifying for a new loan if you haven't refinanced by that time.

Account Closed · Answer

Account Closed Fantastic comment Ken, greatly appreciated.

Account Closed · Answer

@Jay Hinrichs The court can do a "claw back", usually taking anything that was transacted up to six months before the filing. There would have to be a reason for them to do that. It would usually mean that a motion has been filed (a challenge) to the transaction. If someone was trying to hide assets or otherwise not be honest about the transfer, the court gets particularly upset. The whole purpose of the bankruptcy court is to distribute fairly the proceeds and   give the bankrupt a new start. The sale indeed could be set aside in those instances but it typically is more work than the (Trustee) of the court wants to go through.  The Trustee makes somewhere around $175-$250 per file as I remember, plus a percentage (6.5% ??) of easily recovered loot. So, their incentive is to transact the bk within as short as possible time frame. The Trustee is a private attorney who has an exclusive with the court and has staff and overhead to pay. For anyone else reading this: No, I am not an attorney, I simply lived in a neighborhood full attorneys and judges for twenty five years and heard some great stories at parties.

Jay Hinrichs · Answer

Account Closed  I wonder if the BK court could set aside the sale if there was not proper consideration?

How Are Subject-To Sellers Able to Qualify for New Mortgages?

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