In the context of assumable loan discussions, the conversation often surrounds government backed loans (i.e. VA, FHA, USDA). A buyer and seller can undertake the process of having the seller’s loan servicer consider an application and request for a buyer to assume one of those loans. If the loan servicer ultimately determines the buyer qualifies and the loan is eligible for assumption, the consent of the bank is demonstrated through execution of paperwork and documentation provided.
Assumable loan conversations can also venture into a less formal and more problematic type of arrangement. When a buyer presents an offer to a seller that involves some form of taking title to the property subject to the outstanding mortgage(s), the buyer is essentially proposing a loan assumption, but without the permission and consent of the outstanding lien holder(s). This type of arrangement can be problematic in a number of ways. When the deed has been divorced from the deed of trust, the seller is in a vulnerable position. If the loan servicer notices title has been transferred to an outside party that loan servicer can accelerate the loan, calling it due paid in full right away. The title-holding buyer may not have the desire or ability to make that loan paid in full at that time, either through refinance or cash payoff. Any foreclosure activity stemming from buyer non-payment or loan acceleration will show on the seller’s credit report, both for missed payments and for the one-time reporting event of the foreclosure sale, which has very negative credit implications. Sticking with the theme of credit, the loan remaining open in the name of the seller will impact the seller’s debt to income ratio and have a likely negative impact on the seller’s ability to obtain future financing so long as the arrangement remains in place. This includes potentially foiling seller plans to get a new mortgage for another home after moving. I also have some concern about the seller possibly having to contest liability if roped into a personal injury claim relating to an incident at the property on the watch of the buyer.
When agents pass along these kinds of offers for my review and feedback, questions I think of are: 1) If this investor doesn’t have the dry powder to make it a cash purchase, how can a seller trust the buyer not to default if there are problems with securing a tenant or collecting from a tenant? 2) If the investor cannot obtain financing for their purchases, how sound is the cash flow of their operation and total financial picture? 3) If this investor’s operation is as above-board as their marketing material typically suggests, why not work with a licensed NC real estate agent when presenting offers? 4) What is the reason the investor, most often, has only one attorney closing these transactions over the entire state of NC? A buyer may have legitimate responses to one or more of these points of concern, but the fact that there are so many concerns on a proposed transaction of this nature is a red flag that shouldn’t be ignored. I’ve seen these types of proposals fairly regularly over the past couple of years, but I’d have a very difficult time recommending a seller proceed with completing this kind of sale. These offers will sometimes be geared, intentionally I’m sure, towards sellers in default who are likely expected by the buyer to feel more pressure from their life circumstances to accept. Doing so would be unwise, in my measured opinion.
