Low interest rate mortgage loans are very valuable, and many home sellers have them (often at around 3%). In today’s market a traditional mortgage available to a buyer is likely to have an interest rate of around 6% or more. A typical home in Utah sells for around $500,000, which means a buyer with a traditional mortgage will be paying an additional $15,000 or so each year in interest. This is a large amount of money that presents a significant opportunity for both buyer and seller.
Keep that Low Rate Loan
I guide and advise clients through the process of buying or selling a home (or other real estate) subject to the seller’s mortgage. The seller’s mortgage remains in place, but the buyer becomes the owner of the home and becomes responsible for the payments on the seller’s mortgage. If the buyer can’t pay the portion of the purchase price representing the seller’s equity in the home at closing, the seller may be willing to provide additional seller financing, in what is known as a wraparound deal, because the financing from seller to buyer is wrapped around the original financing from the mortgage lender to seller.
Not for Everyone
These transactions involve a number of risks. In particular, the contract between the seller and the seller’s lender states that if this type of transaction is completed the lender has the right to accelerate the loan, meaning the entire loan balance becomes due now (known as the “due on sale” clause). In my experience that is very unlikely to happen, but if it did the buyer would need to refinance or otherwise pay off the loan quickly in order to avoid a foreclosure, which would harm both the buyer and the seller. There are also some other risks and disadvantages to understand.
Substantial Benefits
However, if you are a buyer and are confident that you could refinance the seller’s loan with a traditional mortgage if you needed to (after loan acceleration), the substantial interest savings from this type of “subject to” or “wraparound” seller financing transaction might outweigh the risks. From the seller’s perspective, if you are confident in the buyer, and comfortable with the risks, offering this type of alternative financing might increase your appeal to buyers, and enable you to sell your home more quickly and on better financial terms.
Seller Financing Attorney
There are many legal and contractual issues involved in seller financed transactions (also rent to own, lease option, contract for deed, and other similar strategies), and many methods for mitigating risks and protecting the interests of buyers and sellers. Relying on a real estate agent for this type of transaction is dangerous. I offer experience and expertise in structuring these deals, preparing appropriate written agreements, and helping my clients to a successful closing. If you need a Utah real estate attorney to assist with a subject to, wraparound or other seller financing transaction, please contact me today.