FHA Assumable + 2nd mortgage or other options to sell

Las Vegas, Nevada
Creative Real Estate Financing
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FHA Assumable + 2nd mortgage or other options to sell

Leah Pasco
Real Estate Agent · Las Vegas, NV · Member since 2018 · 6 posts · 3 votes

Hi BP community!

We have a property that has a great FHA loan interest rate, loan of 270k left. This is currently a buy and hold. We were thinking of selling because we've almost maxed out upgrades to the house (new HVAC, roof, appliances, resurfaced pool, etc) but, there would be about an 150k difference from the FHA assumable loan to market value.

We would want to invest some of the profits to buy another rental property to add value to it. Tax 1031 exchange looks like it has a lot of timeframe restrictions which doesn't sound as beneficial in our position. We have lived in the property for 2 out of the 5 years prior and are interested in the capital gains tax exemption.

Our renters wanted to know how it would work to buy our property. I am a real estate agent and new investor, I am always learning! I read on BP that FHA can be assumable and I confirmed with the mortgage company that the property is FHA assumable.

I understand they will need to apply for the FHA assumable loan. The purpose would be to pass down the better interest rate as a benefit to the buyers.

How does one find the 2nd mortgage lending? Would they need to get 2 down payments? (and how likely is a lender likely to consider this?)

I've heard that Owner's can carry a 2nd mortgage but, I'm not sure how that would work? I am guessing we would need a lawyer involved to hammer out the details to become the lender. We are open but, need to figure out how to do this the right way.

I understand some investors can look at Subject To in this situation. From what I understand Subject To means - When taking on an existing mortgage from the seller, the loan stays in the Seller's name while the deed to the property transfers to the Lendee/new owner. The payments are now the lendee's responsibility. However, if for some reason the lendee defaults and no longer make the payments, the seller would be liable and have the risk. I am guessing we would need a lawyer involved to pan out the details, as well, making this a less desirable option.

Are there other options to make this work for both parties?

I truly appreciate your help and advice as we grow in our real estate investment journey!

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  • Leah Pasco
    OP
    Real Estate Agent · Las Vegas, NV · Member since 2018 · 6 posts · 3 votes
    2y

    Hi Ken!

    Thank you for the information. Ok, I was thinking Subject To would not be the right option and this helps confirm that. 

    We can see if they can qualify or find a 2nd mortgage lender. 

    Does anyone have experience or advice if the owner becomes the lender for the 2nd mortgage? 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Leah Pasco, You can lend them as a 2nd mortgage.  My concern would be if they can qualify for the 1st position loan if you're lending them the rest of the cash as well.  My guess is the lender will not go for that.  

    A 2nd mortgage also carries diminished rights.  If they default on your loan your only recourse in a foreclosure is to pay off the first mortgage before you can get the property back.

    Given you're profit situation you'll probably want to do a 1031 exchange on this sale.  And that gets complicated with owner carry scenarios.  It can be done.  It's just got a few more moving parts.

    The 1031 Investor5140 Reviews
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  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    2y

    They are going to have a mountain to get approved with a second. The buyer has to have income documentation same line of work for two years, proof of assets, decent credit to qualify. 

    This is a rounding of numbers: payment p and i on first $1138 PMI $190 payment on second $1101 tax and insurance $460 (doesn't include HOA or flood if needed)

    Borrower needs $7000 of monthly income with no car payments or credit cards or student loans. A FICO of 680 probably is what the standard was. It will be NEAR IMPOSSIBLE for your tenant to find a HELOC purchase loan as a second with a rate under prime + 2 which is a 15 year loan at qualifying at 11.5% Hard money will not do 100% financing (max 70%) and all second trust deed lender is going to want buyer to put 10% down. If tenant has $52000 then they can look at what is the real blended rate of your first and a second starting prime+2 which maximum cap is 22%.

    Your loan is attractive only to someone with a large down payment who can qualify. As a seller you put yourself in grave risk to let someone do a subject to/wrap around/creative mumbo whatever you want to call it. In today's market if you price your house in the middle range you will get MANY offers that do not need to use your assumable FHA loan. Clean, paint and get good photos- take the money for a cash buyer or buyer with their own approved loan.

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  • Ryan ThomsonBusiness Member
    Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
    7mo

    The equity gap is the main thing to solve, and you've got a few real options here.

    First, the FHA assumable piece: yes, this is fully real and fully legal. Buyer assumes your $270K loan and keeps your rate. They need to cover the $150K gap between your loan balance and your asking price.

    **Option 1: Second mortgage from a lender**
    Buyers can sometimes get a second mortgage to cover part of the gap. The tricky part is finding lenders willing to go in second position behind an assumed FHA. It's not impossible, especially credit unions and portfolio lenders, but it takes more legwork. The combined payment on both loans still needs to beat what a new conventional loan would cost, or there's not much point.

    Quick math: if your rate is around 3% on that $270K and a buyer takes a second at 9% on $75K with $75K cash down, their total payment is roughly:
    - First (FHA assumed, 3%, remaining term say 25 yrs): $1,280/month
    - Second ($75K at 9%, 15 yrs): $761/month
    - Total: ~$2,041/month

    A new conventional on $420K at 7%: $2,794/month.

    Still saving $750/month. That's $9K/year. That's the pitch to buyers.

    **Option 2: Seller carry on the second**
    You become the bank for the gap. You get a promissory note secured by the property in second position. Totally legal, and buyers who can't get a portfolio second will love this. You'd want a real estate attorney to draft the note and deed of trust. Rate is negotiable but typically 6-8% for a seller carry second.

    The downside: you're still owed money after closing. The upside: you might actually get closer to full price because you're removing the financing obstacle.

    **On subject-to:** I'd steer clear of that framing here. With an assumption you get full lender approval, liability release, and it's clean. Subject-to keeps your name on the loan . that's the risk you correctly identified. The assumption is the better path for sellers in your position.

    You're in a good spot. The rate difference between your loan and today's market makes this a legitimate selling advantage. Frame it that way and you'll find buyers.

    -

    The Assumable Guy544 Reviews
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