Chapter 4: No Credit Required Options (Continued)


Loan Contract for Deed or Wrap Around Mortgage

One way to get around the newer restricted assumption VA loans is to use a Contract for Deed. This is very similar to a “Sub 2” except with VA loans it is legal and encouraged by the lender.  According to the VA loan regulations:


The lender also can’t charge the normal points, proc essing fees, funding fees, or change the interest rate. That’s a pretty good deal, and there are quite a few of these loans out there.

A Contract for Deed is a method of financing where the owner retains the title to the house until the buyer has paid the purchase price in full. The buyer takes possession of the property and can claim the benefits of ownership, including income tax deductions for interest and property taxes. Since this is not financed through a bank, how to qualify is up to the seller. 

This is sometimes called a wrap-around mortgage because the new loan “wraps a rou nd” the old loan. The seller keeps the loan in his or her name and uses the buyer’s payments to pay on the existing loan. If the seller does not want to collect payments, the buyer can send them directly to the lender.

There is a sample Contract for Deed at the end of this book, but I suggest you have a competent attorney draw one up for you. A settlement attorney will hold the Deed to the property until the loan is paid off, the buyer refinances, or sells the property. The lawyer records the transaction n at the county courthouse, but the buyer is not given full title to the deed until the loan is paid off. This is one reason it is important to get title insurance to be sure your ownership is protected, as well as the interest of the seller and the lender.
 
Wrap-around loans can be very flexible. They don’t have to follow the original contract. For example the sellers could have the contract for deed due in five years, so they will be able use their VA eligibility again at that time. The seller can also raise the interest rate to make a profit if desired. At first this sounds bad for a buyer, but remember that you can use this for bargaining to get something else you want and to make the idea of a wraparound mortgage attractive to the seller.

The Contract for Deed can be somewhat risky for the seller because the seller remains liable for the loan until it is paid off or assumed (by qualified buyer.) To protect the seller, some contracts state that if the loan is defaulted, all the buyer’s payments become rent and the buyer has no claim on the house. The seller can then evict the buyer as a tenant and take back the house. A contract like this makes it a lot more attractive proposal to present to the seller.


Have the Owner Finance.

This is one of the most common methods of buying a house without getting a bank mortgage loan. The hardest part is finding a seller who is motivated to sell their home this way. (I have some ideas on how to find one of these in another chapter.) This is a good way for a seller to get a monthly income and still sell their house. This works well in a market where houses are not selling well. Perhaps the owners have a new home already and can’t afford the payments for two houses. Or perhaps the owner is elderly and would like a monthly income. There are many people who would benefit by “carrying the paper” on their home for you. They might not have even considered the option until you bring it up. If you end up doing this, go through an escrow company and lawyer to make sure the paperwork is done legally and to everyone’s satisfaction.


The Seller Carry-Back

This is really a combination of two techniques, Assumable and Owner Financing. If you find a seller with an old assumable loan there probably is a considerable difference between what the seller wants and what the old loan is. When you get the seller to finance what is left from the rest of the money owed for the house, it is considered a “seller carry-back.” This technique can also be used to buy a home with no money down, if the seller will hold a loan for the whole amount.



This has been an excerpt of the book by Alex Dey called Buying a Home When You Have Bad Credit.



Buying a Home When You Have Bad Credit is written by Alexis Dey, Copyright © 2005-2006 Mohave Publishing. All rights reserved. This book is protected by international copyright law. You may not otherwise resell, reproduce, distribute, publicly perform, publicly display, or create derivative works of this material, unless authorized by Mohave Publishing.  http://I-Can-Buy.com