Can A Seller Finance A Downpayment?

Question

Here's the scenario: I am purchasing a house from a seller for $198,000. He owes $158,000 on the mortgage.  Can I get a loan for $198,000 and instead of putting 20% (roughly $40,000) down with the lender will the lender allow the seller to finance the downpayment after paying off the mortgage?

Steve Vaughan · Answer

I was going to mention a creative way or 2 that I have done this type of thing before, but only assist, (for free, with no obligation) the pleasant...

Bill Gulley · Answer

No, where is your skin in the game? You're asking the lenders to buy it for you.

They might, might, might allow a seller to carry back 10%, you put down 15% and they take 75%.

Skin in the game, that's what keeps a borrower in the deal and not walking away on the first rainy day. You have nothing at risk!

Other borrowed funds is the same thing, it's all borrowed money.

You need to bring more to the table other than promises, a promise to pay, a promise to make it work, a promise isn't collateral.

What is your intention here, are you moving in, holding it to rent, fix and flip or just flip it? There are other methods available for low or no down, but a bank isn't one of them. :)

Nicole A. · Answer

They probably won't allow that. Some/many banks also want to see the source of your downpayment funds....some even want to see that you've had the funds for X amount of months. I was lucky and found a small bank that did not ask where my downpayment came from. So I got creative and borrowed it from a friend with money. We had a written loan and everything. But if you borrow the DP, you need to ensure it doesn't kill your cashflow/the deal.

Troy Gravett · Answer

This is your best bet. But be aware you are NOT assuming the loan, just taking over the payments subject to the existing mortgage. The loan stays in the sellers name, the title gets tranfered to you. Is there a possibility the loan gets called due? yes. Is it likely? probably not. As long as the bank is getting paid each month, they should be satisfied, but every bank is different. They're whole busiess model is to put money to work so calling it due isn't high on their list of priorities. Good luck.

Mike H. · Answer

But you have to be careful. These days almost all loans have due on sale clauses. And once the title changes over, the bank has the right to call in the loan. Typically they don't but it seems there have been some cases recently of banks doing just that.

If that happens, you would need to have some bank refi the house and pay off the other bank.  And your seller would have to agree to that as well as they would have to sign off on the refi that they will allow the new lender to go into first position.  (there's a word for it that I can't remember - subrogate?)

I would just be careful if I were you in assuming their loan and be sure you've done your homework so you're aware of what the implications of that might be (i.e. due on sale clause being called). And then find out what your options might be in a worst case scenario and whether you're comfortable with that risk.

Daniel Berthiaume · Answer

I'm not experienced in this area, but I've only heard from others that you can assume the seller's existing loan, create a second loan between you and the seller for the remainder of the purchase price, and then have the seller transfer title into your name. That way you would have the rights to do what you want to the property. I recommend getting expert advice in the matter though, as I'm not an expert in this type of scenario. Good luck with the transaction.

Bobby Holley · Answer

I like your thinking.  That sounds logical to me.  Do I retain ownership so that I can fix and flip the house?

Bobby Holley · Answer

My goal is to only have as much skin in the game as is necessary.  Using your theory why don't I put in 70% or 80% and get a loan for the difference.  My skin surrounds my brain and its ability to work through scenarios that benefit me AND the house seller.  By the way, there are programs I think you're aware of where the bank does a 100% loan to the buyer.  Think before you pop off.  And you do it often.  Stay humble.

Bobby Holley · Answer

A wrap around loan seems like it has the possibility of working under the scenario I posed.  Can anyone confirm whether the wrap around loan might work?

Can A Seller Finance A Downpayment?

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