A Little Bit About Owner Financing

Dated: 06/01/2017

Views: 102

Let's talk about Real Estate Contracts (REC) in New Mexico. It seems to be a dirty little word(s) to a lot of people but it shouldn't be. Real estate contracts can be a life saving alternative to traditional financing for folks who can't for many other reasons qualify for a traditional mortgage and for sellers who are having difficulty selling.

First, how does it work in a nutshell? Everything is just like purchasing a home with a mortgage or cash. The buyer's broker writes an offer and the buyer and seller agree to the terms. The buyer put down their earnest money with a title company and have any inspections done. Once all of that is completed buyer and seller close on the property with a title company just like in any other sale.  The difference is that when you close, all of the paperwork goes to an escrow company and you make your monthly payments to said escrow company instead of a mortgage company. Then the escrow company disburses the funds each month as stipulated in the contract.

Typically, buyers who wish to purchase on an REC have some reason that is impeding their purchasing with traditional financing such as a high debt to income ratio, recent short sale, not having been on the job for 2 years etc. Their intention is that they will be able to obtain traditional financing within a few to several years. In RECs we call that the draw. Meaning that is when the remaining principal needs to be paid to the seller and typically the buyer would then "refinance" the property into their name.

Usually, an REC buyer needs to have enough money down to at least cover closing costs and depending upon the seller's situation they may require more.

The interest rate on an REC will usually be between 1 - 3% higher than the going rate on traditional mortgages. Everything including the draw, the interest, purchase price and the down payment are all negotiable.

If the seller has a mortgage on their property an REC can still be done but it adds a bit more cost to the monthly payment and there is a chance that the mortgage company could call their note due. Meaning the principal balance on the mortgage must be paid immediately. This is because their is a "due on sale" clause in most mortgages which states that if the borrower sells their property the lender can call the loan due. There are many homes out there right now that have underlying mortgages (Wrap Around REC) that haven't had their notes called due; however, it HAS HAPPENED.Sometimes, if the buyer has been making payments on-time the lender will work with the buyer to give them a mortgage for the property. Other times they would foreclose on the property.

Why would a seller with a mortgage participate in a wrap around REC? Well consider this. For whatever reason, they cannot afford the mortgage payment anymore. They've had their home on the market for three months and are looking at foreclosure as their only option. So they decide to open up their buyer pool to allow an REC. If they are going to lose their property anyway to a foreclosure they have nothing to lose if the mortgage company calls the note due and everything to gain if they can sell their property to someone else.

Why would a buyer purchase a home with a Wrap Around REC? They weigh the risk with the ability to purchase a home that they wouldn't normally be able to purchase. Does the risk of losing their down payment if the bank decides to take the property out weigh the chance to own a home? To a lot of people that risk is worth it.

If you are interested in learning more check out RECs in New Mexico on Security Escrow's website. It is an invaluable resource.

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Regina McKinney

Regina McKinney is dual licensed, meaning she holds real estate licenses in both New Mexico and Arizona and she actively works in both markets. She is an "outside-the-box" thinker with her finger on t....

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