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Can Sellers Offer Owner Financing if They Have a Mortgage?

May 25, 2012 by     Financing, Real Estate

owner-finance-with-mortgage
The biggest part of owner financing that people don’t understand is how to work with a seller that currently has a mortgage. This article will present to you the various pieces of owner financing , how a wrap around mortgage can be used to work with a seller who still as a mortgage , as well as some things to be wary of.

Typical Owner Financing

In a perfect world the best case scenario for owner financing would involve a person who has completely paid off his/her mortage, or is close enough to pay off the rest of the mortgage with a down payment from the buyer. When this is the situation the owner can easily and legally write up a mortgage to a new buyer. This is a binding contract essentially turning the seller into the bank where they are loaning the buyer the money for the house and requiring the buyer to pay off the loan in increments for a set period of time.

As with any loan, the buyer must be able to prove they will be able to pay off the loan, although the seller does not need to have the value of the house in cash at hand because they already own the house. Again this would be the best case scenario but is certainly very likely you will encounter a much different situation in your search for a home.

Owner Financing With a Twist

Now for the information you’re really interested in which is how to go about setting up an owner financed deal when the seller still owes a mortgage. It is important to understand first and foremost that the original owner is still reponsible for paying back the mortgage with their own funds. With the original mortgage in place you can, however, utilize what is referred to as a wrap around mortgage.

A wrap around mortgage allows the seller to loan a buyer a second mortgage on the house which “wraps around” the current existing mortgage. She may use the buyer’s payments to both pay for her remaining mortgage and cover the rest of the valued selling price of the house. For example, if the owner had a remaining mortgage balance of $100,000 and the house was worth $150,000, she may charge the buyer the $100,000 in morgage payments and then profit from the remaining $50,000 of the value of the house. This can be a tricky process and can leave you at risk in certain circumstances so we strongly recommend contacting a real estate professional if you are considering this route.

Beware of Possible Problems

We do want to forwarn you that in the case of a wrap around mortgage if at any point the owner defaults on the original loan the bank could possibly foreclose on the property leaving you without a home. Another aspect of the wrap around that can be of issue is the due on sale clause which is often included the terms and conditions of mortgages from lenders such as banks. This due on sale clause means that the lender has the right to call upon the entire remaining balance of your mortgage as soon as the property transfers owners. Even though this would be rare in such a poor economy we do want you to be aware of the possibility. Your best bet to protect yourself and your purchase is to make sure that the seller is currently in good standing with the bank and continue to monitor payments until the owner has paid off the home. You can utilize special contract options that protect you from some of these situations so as we stated previously please consult the advice of a legal professional in your area.