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It's not easy to sell your home these days, but it's not all that easy to buy, either.
Here's the problem in a nutshell: There's an excess of homes on the market, but the buyers who normally would scoop them up (thanks to falling prices and low interest rates) can't get financing because the lenders have tightened up on whom they'll lend money to.
If stressed-out sellers and hard-to-qualify buyers could just join forces, they could both achieve their goals. The answer may lie in what's commonly called creative financing.
"This is the time to get creative," affirms real-estate expert Wendy Patton, a co-author of "Making Hard Cash in a Soft Real Estate Market."
"If you really want to sell your home, you need to expand your pool of buyers to include those people who want to buy a home but can't qualify for a standard mortgage at this time," she says. "This pool is actually much, much larger than the pool of buyers who can get a mortgage right now."
Or as management and marketing consultant Nan Andrews Amish puts it: "The goal is to make it easier for buyers to say yes. This means creating better value for the buyer or less risk or easier financing."
Scott Christiansen, the senior mortgage originator for WestCal Mortgage of Orange, Calif., agrees: "In this market people are getting much more excited about doing whatever they can to sell a property."
Every week since the subprime fallout, he says, new financing programs have been introduced.
3 major ways to do itReady to get creative about financing to entice buyers? There are three major options:
1. See if your lender will allow a mortgage assumption.
In this sort of agreement, the buyer takes over payments on an existing mortgage. If that loan came with a low rate, assuming the loan could be advantageous. Not to mention, the buyer could save on higher closing costs associated with new mortgage debt.
Though banks have traditionally not allowed assumable mortgages and some mortgage experts don't see that changing, especially on 30-year, fixed-rate loans, others are seeing some cases of it.
"Most mortgages are nonassumable," says Patton, "(but) given the challenged market conditions many areas are experiencing, this may be negotiable with the lender."
With a homeowner in financial trouble, for example, the lender might prefer to allow the loan be assumed than to foreclose on the property, notes Jason R. Hanson, a real-estate investor.
Christiansen says a number of large banks do allow assumptions on certain new and existing adjustable-rate mortgages. "I wouldn't be surprised if more continue to do that," he says. "It's worth checking out."
When an assumable mortgage is available and favorable, it would certainly entice buyers.
Before promoting it, though, 40-year real-estate veteran Arnold Peck, the president and owner of ERA Property World in Milford, Conn., says he would make sure both the rate and terms -- such as pre-payment penalties -- made it desirable. "I just had a fellow with a $100,000 pre-payment penalty on a $300,000 loan."
For protection, any seller whose lender is allowing a mortgage assumption should obtain a written release from further liability. In other words, never take it for granted that just because the buyer qualified for the deal, he will pay each month.
Also check on whether the standard "due on sale" clause can be waived. Though Hanson and Patton point out that lenders would have no reason to call a loan due, provided payments were still being made on time (because foreclosure proceedings are costly), Christiansen says it's something to inquire about and that lenders might waive it.
It's also important to consult a real-estate attorney if this route is being considered. Mortgage assumptions are often confused with purchases that are "subject to a mortgage." Typically, subject-to deals are those in which the purchaser agrees to make monthly payments on an existing mortgage but the original borrower remains personally liable if the new buyer fails to make those payments. Because of that liability, the lender's consent is not required.
Besides being a seller risk -- think credit risk and foreclosure -- subject-to sales aren't legal, according to Paul Wylie, the founder and former CEO of Metrocities Mortgage in Southern California. In addition, Wylie adds, "A lender could find out about an unlawful assumption and call the loan due."
2. Help a buyer build a down payment through a lease-to-own deal.
The buyer acts as tenant for a set period of time (usually one to three years), with some of the rent getting socked away in an escrow-type account to later be applied toward a down payment. In a lease-option situation, the buyer can choose not to buy at the end of the option period but would generally lose that built-up cash. With a lease-purchase, the buyer must purchase the house in the end.
Either way, the buyer becomes a tenant for now. Only he doesn't "have the typical tenant mentality," notes Patton, because the intention is to one day buy the house.
Yes, these deals are risky.
"Lease-purchases are hairy-scary to me because you still may have the buyer walk, (and) the seller is still the owner," says Janice B. Leis, a Prudential Realtor covering Philadelphia and south Florida. "And usually both sides are too cheap to hire a real-estate attorney. Sellers need to stay away from those legal entanglements that may create more of a financial wrangle for them down the road."
But there are some good potential tenants today, says Stan Lund, the owner of a mortgage firm and 2007-08 president of the Arizona Association of Mortgage Brokers. "A lot of people have lost homes due to foreclosure. They're good people but just had some bad circumstances happen to them. They're good borrowers but maybe they got into the wrong loan, or they took a chance in risk and tried to (own too much) house."
Bobby Wallace, a South Carolina affiliate for 1800sellnow.com, compares lease-to-own deals to "selling someone a home with training wheels." His suggestion for sellers: "(Do) everything in your power to make the buyer truly realize that this is a tremendous opportunity to enhance their credit and not waste it."