Usually, when you buy a home, you’re faced with a long hassle as you get approved for a loan to fund your purchase. You fill out a lengthy application. The lender orders a credit report. You pay for an appraisal. The lender verifies your income, bank accounts, other assets, and checks your payment history of rent or your old mortgage. It goes on and on, often for weeks, while you and the seller languish in limbo.
Wouldn’t it be great if you could just close the deal without getting entangled with a lender at all? (Or what if you know you can’t qualify for a loan and need another plan?)
Believe it or not, there IS a way to buy houses WITHOUT getting persmission from a lender! It’s called “taking title to the property ’subject to’ any existing liens or loans”.
Here’s what’s in the subject to clause:
A clause in a deed that transfers title from a seller to a buyer in an assumption transaction, or in other paperwork for the assumption transaction, in which the borrower refuses to accept legal liability to make payments, although the buyer is expected to do so. The lender’s remedy for nonpayment is limited to foreclosure, and neither the lender nor the seller can sue the defaulting buyer for missed payments on the loan balance…
You can use subject to financing to purchase a house in foreclosure. Of course, you’ll need access to quick cash (either yours or another investors) to bring the defaulted loan current, and provide the sellers with some cash for their equity so they can move on with their lives. (Please read: How to Finance the Purchase of a House in Foreclosure.)
When buying a house in foreclosure you must determine what you will be offering. (Please read: Doing the Math Quickly and Easily.) Then you must check the state of title to see what is owed. (Please read: Your Fastest Way to Determine What is Owed.) What is left is the sellers net equity, which is the amount of cash he will get at close of escrow.
There is much to do between the time you get the seller to say YES and the time you close the transaction. In The Mechanics of the Deal you will find the basics of closing the deal outlined. There you will see that you do take title to the house (through a Grant Deed), even though the loans do not change names. Do read this months Reference Desk to learn What happens in Escrowas well.
Of course to learn the exact “what to do, what order to do it, how to do it” you will need to complete my Six Steps to Mastering Foreclosures CD Homestudy.
In the hot market we’ve been in, that cash has been substantial. Sellers have had more than just moving money. In some cases, they’ve pocketed enough cash set aside many months pre-paid rent. Sometimes they even get enough to save for their next house down payment. These are truly great times to be a preforeclosure investor!
I know many of you are brokers, real estate agents or attorneys, and are wondering how to deal with the possibility that the existing lender will call the loan when they find out what you’ve done.
First of all, the lender is not in the loop at all when you do a “Subject to” deal. You are taking over loans that remain in the seller’s name, without asking the lender’s permission. You bring them current and then keep them current.
The right of the lender to invoke the due on sale clause in the loan document is a contractual right, not a legal right, so no law has been broken. Other than your escrow company contacting the lender for final reinstatements and loan balances (which is normal when you refinance as well), you don’t contact the lender with any information about your transaction. No false statements are made, no fraud is committed.
For a detailed review of the legal impact of a due on sale clause when taking title “Subject to” please read real estate attorney William Bronchick’s excellent Legal Corner article “There is No Due on Sale Jail”.
Secondly, why would the lender call the loan, when it has been brought current and is being kept current? You’ve solved a problem for the lender and the borrower. Plus, since the loans stay in the sellers name, you are now are actually improving the seller’s credit!
Conversely, if you drop the ball and let the loan go delinquent, that impacts the seller’s credit alone. If the lender has to foreclose (as this is their only remedy) the foreclosure shows up in the seller’s name, but remember the house is in your name. You would then lose your cash, equity and all your profit, so you would not let that happen!
Of course, before you buy any foreclosure property, be sure you are familiar with your local foreclosure and real estate laws. Click here to review the law for your state. Plus do make sure you get good real estate legal advice so you don’t make any costly mistakes.
The foregoing has been prepared for informational purposes only and does not constitute legal advice.The information is summary in nature and does not address any particular situation.Readers should not act upon this information but should instead seek professional advice.
