Uniontown, PA · Member since 2021 · 8 posts · 3 votes
Hello Everyone,
I hope everyone is well this morning. I'm taking an online class and the subject today is Owner financing. I have a question in regards to carrying back a second mortgage when owner financing. The material gave an example of when the buyer down the road defaults on the senior mortgage, would the seller be able to foreclose. The instructor states you should not foreclose because of the time involved but instead buy back the property just for the LTV of their bank loan, 80%, and you should resell it to a new buyer. The buyer could only get approved for 80% LTV of the property and the seller agrees to finance the remaining 20%. From my understanding there is the Due on Sale Clause so which means the senior mortgage would have been already paid off, so how would the buyer be behind on the senior mortgage in the first place? I hope I worded this question so that it makes sense. Please any information would be appreciated. I'm just now taking the steps to become an educated investor.
I hope everyone is well this morning. I'm taking an online class and the subject today is Owner financing. I have a question in regards to carrying back a second mortgage when owner financing. The material gave an example of when the buyer down the road defaults on the senior mortgage, would the seller be able to foreclose. The instructor states you should not foreclose because of the time involved but instead buy back the property just for the LTV of their bank loan, 80%, and you should resell it to a new buyer. The buyer could only get approved for 80% LTV of the property and the seller agrees to finance the remaining 20%. From my understanding there is the Due on Sale Clause so which means the senior mortgage would have been already paid off, so how would the buyer be behind on the senior mortgage in the first place? I hope I worded this question so that it makes sense. Please any information would be appreciated. I'm just now taking the steps to become an educated investor.
Hello Kaleb,
Your question about owner financing and the situation involving a second mortgage in the case of a default is quite insightful. Let's break down the components to clarify the scenario and address your thoughts:
Owner Financing and Second Mortgages: In owner financing, the seller of the property acts as the lender, providing a mortgage to the buyer. This arrangement often occurs when the buyer cannot obtain a mortgage from a traditional lender. If the seller is carrying back a second mortgage, it means the buyer has two mortgages: the primary (senior) mortgage, typically with a bank, and the secondary (junior) mortgage with the seller.
Default on the Senior Mortgage: In the example you provided, the buyer defaults on the senior mortgage. This could happen for various reasons, such as financial hardship, even if they are still paying the second mortgage to the seller. The Due on Sale Clause you mentioned is a provision in a mortgage or deed of trust that requires the borrower to pay the remaining balance of the loan in full if the property is sold or transferred. However, this clause is usually triggered by the sale or transfer of the property, not necessarily by default.
Seller’s Response to Default: Your instructor suggests that instead of the seller foreclosing on the property (which is a time-consuming legal process), they should buy back the property for the Loan-to-Value (LTV) ratio of the bank loan (80%). This implies that the seller would pay off the bank loan, essentially buying the property back from the bank.
Reselling the Property: After buying back the property, the seller could then resell it to a new buyer, possibly offering owner financing again. In this scenario, the new buyer gets a bank loan for 80% LTV, and the seller finances the remaining 20%.
Clarification on Due on Sale and Default: The confusion seems to arise from the interaction between the Due on Sale Clause and a default. The clause does not automatically pay off the senior mortgage; it can be triggered if the property is transferred or sold. In a default situation, the senior lender (the bank) has the right to foreclose on the property, but the clause itself doesn't pay off the loan.
Seller's Strategy: The strategy suggested by your instructor is a way for the seller to regain control of the property without going through foreclosure. By paying off the bank loan, the seller can avoid the lengthy and costly foreclosure process and can quickly resell the property, potentially to a more financially stable buyer.
Hope this helps, and I hope I understood your questions/concerns.
Uniontown, PA · Member since 2021 · 8 posts · 3 votes
2y
@KC Pake Thank you KC for taking the time to break down for me. You explained the scenario I provided in a way that makes total sense. You also cleared up my confusion with the due on sale clause. Again thank you for your time.
I hope everyone is well this morning. I'm taking an online class and the subject today is Owner financing. I have a question in regards to carrying back a second mortgage when owner financing. The material gave an example of when the buyer down the road defaults on the senior mortgage, would the seller be able to foreclose. The instructor states you should not foreclose because of the time involved but instead buy back the property just for the LTV of their bank loan, 80%, and you should resell it to a new buyer. The buyer could only get approved for 80% LTV of the property and the seller agrees to finance the remaining 20%. From my understanding there is the Due on Sale Clause so which means the senior mortgage would have been already paid off, so how would the buyer be behind on the senior mortgage in the first place? I hope I worded this question so that it makes sense. Please any information would be appreciated. I'm just now taking the steps to become an educated investor.
1. If the buyer defaults on the first mortgage and is paying you and you are in 2nd position - NO you cannot foreclose. Only the first position lien holder can foreclose
2. Buy back for LTV of bank loan ? Who is this "guru" .... First the person is not just going to sell you back the home, and the legal fees incurred its typically going to be for more than what the original amount was. Also what if the property value has declined?
The reason they will not sell is their credit is shot, rent is too expensive and they have no place to go. How do I know this? Becuase I am a lender an defaulted loans rarely if ever foreclose (less than 10% of ours), and the borrowers will file bankruptcy. If you do foreclose it will be years because of the BK play and they can live in a house without paying.
There is a due on sale clause has nothing to do with default and even then you still need to foreclose and the mortgage is not magically paid off.
