You may be surprised to learn that the Easy Way to Get Low Down, Low Interest Loans is not some new government subsidized program. In fact, there is nothing new about this time proven technique which was a major source of financing during the high interest rate era of the late 70s and early 80s.
The Easy Way to Get Low Down, Low Interest Loans is to simply assume an existing loan that was made in the last several years! Throughout the United States today, there are millions of properties that have little or no equity (thus the opportunity for low down payments) and which are subject to low interest rate financing with 25 or more years of fixed interest rates remaining. What is even more important is that, these loans can be assumed without proof of income or credit! Due to Alaska’s stronger real estate market, most Sellers will have some equity, but there are still a lot of homes with low equity that have existing, low interest rate loans that can be assumed without verification of credit or income.
By now I am sure some of you are thinking, “Ken, are you stupid? Don’t you know about ‘Due on Sale’ clauses that make assumptions illegal?’ While I may not be the sharpest knife in the drawer, I do know about “Due on Sale” clauses. I also know that it is a complete myth that assuming a loan with a “Due on Sale” clause is illegal! If a loan is assumed without the Lender’s consent, no one will go to jail, no one will be fined and no one will be arrested. The sole remedy for assuming a loan without the Lender’s consent is that the Lender may call the loan due and payable in full!
I have had a loan called and had to pay it off due to assuming a loan without the Lender’s consent. BUT that occurred during a strong real estate market when interest rates were rising. Obviously the lowest risk way of doing an assumption is to get the Lender’s consent to the sale. Unfortunately, in this day of “brain dead” Lenders and the securitization of loans, it is often impossible to find someone with the authority to issue the consent.
Assuming that it is not possible to get the Lender’s consent, it is then important to do a realistic risk analysis. With millions of home loans in default or foreclosure—“How likely is it that a Lender will risk another foreclosure by invoking the ‘Due on Sale’ clause if payments are being made, taxes are being paid and insurance maintained?” While I can’t say that the risk is zero, I can say “The risk is extremely low!”
There are three types of assumptions. While we generically use the term “Assumption” for all three types, it is important to understand the different types of assumptions and the ramifications to both Buyers and Sellers. The three types of assumptions are:
· Taking title “Subject To”
· Standard Assumption
· Substitution
Taking Title “Subject To”: With this type of assumption, the property is deeded to the Buyers subject to the existing loan. The Buyers do not agree to legally
assume the obligation to pay the loan. Of course, they could lose their equity through foreclosure if they failed to make the payments. Taking title “Subject To” is, for the Buyers, the equivalent of having a non-recourse loan. For certain partnership purchases, where it is important for limited partners to have a higher tax basis, it is very important to have non-recourse financing. With a “Subject To” transaction the Sellers remain fully liable for the loan.
Standard Assumption: This is the most common form of assumption and usually results in a provision in the Deed, or a separate agreement, whereby the Buyers agree to accept full responsibility for payment of the loan and hold the Sellers harmless. In these situations the Buyers become totally responsible for the loan, but the Sellers only option for enforcing that obligation is a law suit against the Buyers. Since the Lender is not a party to the Standard Assumption Agreement the Sellers are still fully responsible to the Lender, but could, of course, sue the Buyers for any damages suffered. A way of protecting Sellers in Standard Assumptions is to simultaneously create a so called “Zero Balance” Deed of Trust, which allows the Sellers to foreclose on the subject property if the Buyers default. In that manner the Sellers could get back into title and cure the delinquency and then pursue legal action against the Buyers for their failure to pay the loan.
Substitution: With a Substitution there is a three- way agreement whereby the Buyers agree to assume the loan and the Lender agrees to release the original Borrowers from their obligation on their loan. Clearly this is the best option for Sellers, but is one that is often difficult to get Lenders to agree to. It is important to note that the Lender’s consent to the sale is not a substitution. When a Lender consents to a sale, they merely waive the right to exercise their “Due on Sale” clause, but unless they specifically agree to release the Sellers from liability, consent to sale is not a Substitution.
Today, the easiest way to get a low down, low interest, non-qualifying loan is to simply purchase a home with an existing loan and assume that loan.
There are certain risks, particularly to Real Estate Licensees, that can be greatly reduced or eliminated by proper structuring. To learn these valuable structuring techniques, be sure to read Part 2 which will be posted on May 7, 2011!