Seller Financing structure

10 Replies

Before I start paying my attorney, I would like to hear suggestions from BP members.  I'm working with an owner open to seller financing with a 3-year balloon.  The details are as follows:

Purchase price $385,000.  It has historically been rented for $1,800/month.  The mortgage balance is roughly $180,500. Payments are roughly $1,500 including taxes and interest.  The home is also collateral for a line-of-credit balance of $62,000, and a current monthly finance charge of $130. 

The sellers are not desperate, they got tired of renting so the house has essentially been vacant for the past 3 years aside from it being a guest house for family visiting town.  It has never been listed for sale.

This would be my primary residence.  I can afford to pay off the mortgage of $180,500 but not the line-of-credit.  Would it be wise to try and pay off both or neither? Or just leave the notes in sellers name, take title, and have a loan servicing company take my monthly payment and distribute accordingly? 

My fiance will be finishing school and our combined salaries will easily allow us to obtain a note for the full purchase price when the 3-year balloon comes up.  I appreciate any input you would like to share. 

@Johnny Wehmann 

I would try to tie up with as little money as possible and make sure there is a no prepayment penalty.  That way you can't lose because you can pay that amount whenever you want and when the timing is right for you.  With the rent of both payments still being less than the going rent, if you ever get into a bind you could rent it out.  Of course assuming you make sure you have the option to lease during the 3 years.  Hope that helps.

Why seller financing on a primary residence? You have a sufficient down payment.

This will be subject to Dodd-Frank as a primary residence, that means you qualifying if the seller is not clearly exempt, even if they are, are you qualified at a much higher rate than conventional financing?

You might be able to stay away from the issue by doing a lease option, pay a small option price, ensure you are not overpaying, you can sign a 3 year lease. The only thing you have at risk is the option price. Any additional payments besides a lump sum option price that would be credited to the purchase price will be financing, so don't go there. Simply save for the additional purchase transaction when you finance it.

Banking on a future job isn't really prudent, depends on here degree I suppose, anything short of a doctor can have time on the job requirements to qualify for a loan, so if she is out in 3 years, she won't have time on the job of more than a year (can be less in a line of work of here degree).

I certainly would not put that lump sum down, keep it as low as possible. A good 3 year lease might be all they might really required! :)

@Johnny Wehmann  When you say "I can pay off" do you mean pay the payment or write a check and pay it off??

If you can pay off the first, i would just tell you to pay off the 2nd and make payments on the first.

My main concern on this deal is leaving the Home Equity Line Of Credit (HELOC) "open". You need to have the sellers close it, so no more can be drawn against it.

@Judah Hoover  @Bill Gulley  

Thank you for your replies.  I misworded what I can afford; I could qualify for a mortgage of up to $180,000 but I do not have the cash to pay off that amount.  And ironically she is in her final year of medical school so we feel comfortable banking on her being employed.  

I would prefer the lease-option but the seller was more reluctant to consider it.  It's a one of a kind house that we fell in love with but can't afford to purchase today, hence the reason I'm trying to find a way to make it work. 

It does seem that a lease option could be a good way to go.  Is $1500 to 1800/month affordable.  If it doesn't cost too much, I would try to get an extra year on the option.  You can always exercise early if it makes sense.  That way you aren't rushed into buying when you aren't ready.

If you can't currently afford the rental payment, I would look for something cheaper and plan to buy when I was out of school.

Well if you can only afford a mortgage of $180k i am guessing you cant afford $1630/month... much less the $1800/month they would expect. What do you think you could pay a month? will they accept that, putting NOTHING to the eventual purchase price if you agree to buy it for $385k 3 years from now with no realtor expenses? That seems to be your highest and best offer that you can make. If they take it great, if not... walk. Don't get too "cute" on this deal structuring a crazy deal that you cant absolutely afford. There are plenty of great houses. Have faith that you will find one.

I would wait to find the best house you can afford today, always make decisions with your heart and head... Falling in love with a property could be a recipe for disaster.

Good luck

@Judah Hoover   They expect $1,800 per month which we could handle but some of these comments have me 2nd guessing whether it's even worth it.  If I make an offer I think I'll keep it simple as you suggested and move on if it doesn't fit their needs. 

Is the 385K, the price you want to pay or their asking price?

I would propose 6.8K option price, $1500/month rent for 4 years and a 340K purchase price.

It looks like a bit of an low-ball offer, but I think it is a reasonable starting point.  330K w/o a realtor is the same net as a 367.6K with an agent.  The option payment is their share of the savings.  The rent will cover their holding costs and they get a little equity from the payments.

I would expect that the option and rent will get negotiated up.  If the price has to be much higher, it would need to appraise for the amount.  Other-wise you end up risking your option paying for an "under-water" option.

LOL, med school! I assume you mean an MD, not an Xray technician or nursing.

So, the property is not listed, how does the seller know what it is worth and how would you know? Falling in love with a house is not a good thing, fall in love after settlement, not before!

Will the seller pay off the HELOC and carry that portion back at a higher rate?

Any other source of funds, family? Other assets?

Last year of med school, well, you're in different company so to speak.

Is the lender that holds the first mortgage in town where you can go to them with the seller?

What funds do you have available for settlement costs and a down payment?

I think a good sit down with the seller's banker (or yours) may solve this.

You can do a delayed purchase, up to one year, maybe 6 months. Does she have a job offer yet, is she working part time now? When will she be in residency?

In lending, there is an underwriting aspect that can use "compensating factors" to approve a loan, you may not hit a secondary market loan but a portfolio loan at a bank is not out of the question. A bank may bridge the loan for a year, a 65K amount could be deferred as a second, or interest only. A HELOC may close in connection with a purchase, the HELOC lender may extend that type of loan to you.

A bank will usually bend over backwards as far as they can for a new customer that is or is very close to being a doctor.

They would rather see you married too, any break up having unrelated parties in joint tenancy with both being on the loan may not technically be a disqualifying matter, but it can be an issue and you are asking for a favor so to speak.......that can cause a financial strain.......any date planned?

I also suggest you have the place appraised, before falling further in love with it and ensure it appraises out for lending purposes. You don't have room for error as to the value.

I would think that between your bank, your fiancé's and the sellers bank, more conventional terms could be constructed, if you can carry the 185, she will be carrying 200 and that is not a far reach considering her monetary propensity in less than a year by the time you would actually be closing.

Another way too, is allow the seller to execute the note with you on a one year portfolio loan, hold title with a option to buy out his interest in one year. If he qualified for the mortgage and the HELOC, I'd think he and you and your fiancé could all three swing a short term loan. He may get his sale price, be out from under the fears of landlording and get all his money. Then refinance and buy him out in a year when she is bringing home bacon and some pork.

I think too, that a lease with that seller, after going to the bank and being assured of future financing, simply having a settlement even at one year would be more acceptable to them. They probably want it sold and don't want to get stuck with a tenant situation, so you need to sell your ability to carry through. If your credit is fine, this can be a delayed sale and use a conventional financing arrangement.

Okay, if that isn't possible, then your funds will need to be used and go for a subject-to transaction, get a servicer and assume the existing debts. Frankly, I would think the owner would be more inclined to go on a note with you, cashing out than just selling on a sub-to being responsible for the full boat load and hoping you make the payments.   

Secondary market loans can be had for doctors in residency and a contract. While they may not qualify initially the contract can be used for qualification so long as qualifying ratios aren't over 50%. Hope you aren't driving a new Jag on payments!

I like to exhaust any conventional financing arrangement before getting creative outside customary avenues, you have some creative approaches within customary banking activities. Another aspect, a letter of opinion from your attorney or the seller's attorney more so, as to the financing being exempt as a seller financed deal would be good to have if you do the Sub-to. That would also help any bank in being more creative if the seller remained on the note with you as they will have Dodd-Frank issues of doing a high-priced loan (which is what they are called, not that they are actually high priced).

If you don't want to air your personal financial laundry in public forms, connect with me and I'll address this privately for you. We can then come back to the forum keeping confidential information private. We could also follow up on the deal.

Again, I suggest you get an appraiser going on the property as it may cost about one tenth of one percent of this deal, 300-500 now will tell you a lot of how to proceed or if you should proceed! Good luck :)

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