Owner Financing or New Loan

[Robert Littke]

Ok, I'm going at re post this because it disappeared and in the BiggerPockets abyss. So here goes the lengthy explanation (Again).
I have a client with a $230,000 mortgage on a $260,00 home and a 6 month old bankruptcy, credit score of 670. She wants to move to and has someone interested in her home who has a $300,000 home they own outright. My client is interested in taking over the buyers home but has been told by a lender she probably wont qualify for a loan for at least 36 months. What are her options, that would best protect buyer and seller. Pro's/Cons. (The homes are in different states)

[Jon Holdman]

I'm going to call these two people A and B. A owns house #1 worth $260K that has a $230K mortgage outstanding. A has bad credit that will take a few years to fix. B owns house #2 worth $300K. B doesn't want a mortgage. A and B want to swap houses and (guessing a bit here) have A end up owning house #2 with a mortgage and B end up owning house #1 free and clear.

If A could simply get a mortgage now to buy house #2 and sell house #1 to B this would be nice and clean. Since A can't get a mortgage, its not going to be clean. Both A and B will have to deal with that or this deal isn't going to happen.

I assume the difference in values doesn't matter. If it does, B is going to have to deal with waiting a few years to get that cash.

You could do it as two owner-financed deals. B sells house #2 to A as straight seller financing. A sells house #1 to B with a wrap mortgage. Structure the deal so the payments are roughly the same as A's current payment. Use a third party escrow service to make the payments on the existing mortgage on house #1, and the insurance and taxes. Both A and B pay taxes and insurance payments into the escrow and A continues to make her payment. Because the payments on the seller financed mortgage and the wrap cancel out, neither is making payments on these two loans, just paying the taxes and insurance.

Like Mike says, getting someone to buy the note on house #2 is a possibility. The note will get quite a bit of discount, though. But perhaps given the difference in values in the houses and the loan on house #1 that would generate enough cash to pay off A's loan on house #1. B's wrap mortgage on house #1 would get paid off at the same time and now B own's house #1 free and clear. The note buyer has assume the risk for A's loan on house #2.

If B doesn't want to give up the equity (I wouldn't), then this situation will just need to persist until the point where A can refi house #2, and pay off B, which will in turn give B enough cash to pay off the wrap on house #1 which in turn will give A enough cash to pay off the original loan. Whew! A title company will keep that straight, though. Convincing a lender to fund the refi with all that complexity might be a little challenging.

I don't see a clean way to do this. A and B are in very different positions. A has a house with very little equity and has crummy credit. B has a house with a lot of equity. B is taking a lot of risk no matter how they do this.