How do you sell a house when you owe more than it's worth?

How to sell a house when you owe more than what it’s worth

If you don’t have any equity in your home it makes it really difficult to sell. Particularly when you take out realtor commissions and closing costs you can often be left having to write a big check at the closing table. Nobody wants to have to pay money to sell their house and this can be a frustrating situation. But you do have options. We often purchase properties like this by taking over your mortgage payments.

How does a take over mortgage payments sales work?

Traditionally when you sell a house with a mortgage the title company will remove the lien against the house by paying the mortgage out from the proceeds of the sale. So let’s say you sold the house for $110,000 and you owed $100,000 then the title company will pay the $100,000 to the bank and the remaining $10,000 would be used to pay realtor commissions and closing costs and you would receive what is left after that (if there is any). With a take over payment deal, we would buy the house but leave the lien in place. To follow on from the example if we paid $110,000, the $100,000 lien would stay in place and we would take over the payments on the note and the remaining $10,000 would be paid to you as cash at closing. This is a really good way to sell your house when there isn’t much equity so you can avoid having to pay money at the closing and actually turn your house into cash.

Why would we take over your payments when there is no equity?

We are professional landlords and are very comfortable managing properties so can often make deals with no equity work as a rental property. We generally pay cash for the houses we buy and when we do that we obviously need to get a certain return on our cash. When we take over payments we don’t need to put as much money into the house so don’t need to get the same return. While we wouldn’t pay cash when there is no equity in the deal we can often make it work when we leave the existing financing in place.

Who is responsible for taxes and repairs?

We become the legal owners for the property so are responsible for all property taxes and maintenance. If a tenant hurts themselves in the property and wants to sue they would be suing us as the legal owners on the properties. We are responsible and mange everything and of course will still make note payments even if the house is vacant and we aren’t receiving rent payments.

What if you stop making payments?

If we stopped making payments you are able to take the property back from us. I know you are selling the property and don’t want it back, but trust me we are in the business of buying houses not giving them back. In the unlikely event that this happened you would actually be in a better position. You would have been paid cash at closing, we would have been paying your note down for you along with making repairs. If we stopped paying after a few years you would have more equity in the house and would be able to sell again. Obviously we are not going to let this happen but you are protected if it does.

Is a take over payment deal legal?

Yes it is. We use a Title Attorney to do the paperwork and the closing. They ensure it is done legally and correctly. While we will pay their fees they don’t work for us and are a neutral party whose job it is to ensure that the transaction is legal. You can ask them questions directly and get advice from them through the process.

Won’t the bank call the loan due?

Banks are in the business of collecting payments on loans and don’t like to call loans due. There is a “Due on Sale” clause in most loan contracts which says the bank “can” call the loan due if the house is sold. So legally they can do this but practically speaking they have no incentive to do this when the note is getting paid. If you have had your loan for a while you will probably find that the bank sold your note to another bank or servicing company (possibly several times). They don’t really care who is making the payments, they just care that it is being made. If for any reason they were to call the loan due we would deal with this and try and get them to change their mind or alternatively try and refinance/pay off the loan.

Can I still get another loan?

You would need to consult with your broker to get a personalized answer to this. The thing to note is that the loan will still appear on your credit report. This can be negative and it can be positive. On the one hand it will count in your debt to income ratio which can make it harder to get a loan. On the other hand the payments you have been making in managing the loan can have a positive impact on your credit rating. Generally speaking if you aren’t looking to get a new loan straight away then the loan shouldn’t affect you too negatively. While the Debt is in your Debt to income ratio after a couple of months of us making the payment most mortgage companies will recognize 75% of our payments as income. After 12 months of being able to demonstrate that we are making the payments then most mortgage companies will recognize 100% of our payments as income which will mean the debt and income cancels out. You should consult a mortgage broker about your specific situation, particularly if you are looking to get a new loan straight away.

Can I sell my house this way if I am behind on my mortgage payments?

You can still sell your house with a take over payment strategy if you are behind (Even if you are facing foreclosure). We would catch your loan up at the closing and then take over the house payments going forward.

I have heard of selling a house “Subject to” is that the same thing?

Yes it is. Selling a house “Subject to” is the technical term for this type of transaction. It is called this because it is recorded in the closing statement that the house was subject to the existing mortgage. This is just the technical way of saying that the lien was not cleared when the property was sold and is still recorded against the property.

Why would I sell my house this way?

People generally sell their house this way because they want to get more money for the house. When we buy houses for cash we obviously need to get a return on that cash. When we buy on a take over payment we don’t have to put as much cash into the house so don’t need to get the same return. This means we will pay more for the house.

Would you take over my house payments?

We would need to know more about your situation to say for sure. The terms of your loan, the amount you owe and the house itself are all factors in whether this strategy will work for you. Give us a call or fill in our online form and we can discuss your specific circumstances.