Approach owner-financing with care - and a lawyer

REAL ESTATE MATTER

thinkglink.com

October 19, 2008|By ILYCE GLINK

I'm wondering if it would be easier to sell our house if we offer owner-financing to buyers. How risky is that? What about all the legalities? We have a real estate attorney. Will we need anyone else to help us with the documents?

You can arrange owner-financing through your attorney or through a site like VirginMoney.com.

To determine your risk of default with potential buyers, you need to interview the buyers and determine what kind of people they are, what type of jobs and income they have, and the odds that they will continue to be employed. You need to look at their credit histories to see if they have a history of paying their bills on time. Once you sell the home, you'll be like their bank. If they default, you'll have to foreclose on the home to get it back.

Obtain a credit report on the buyers from at least one, and preferably all three, of the major credit reporting companies. You'll want complete credit information on each buyer (husband and wife, or partners) who will be listed on the mortgage.

What you have to think about is this: People with bad or even mediocre credit can't get loans that easily at the moment. But interest rates are still low. If you want to take on someone with a perfectly awful credit score, and not charge that much in interest, you might find someone good who is just momentarily down on his or her luck.

Or you might get someone who does the deal, moves in, trashes the house, strips it clean and moves out. Yes, you get back the property, but now you have to clean it up and find someone else to buy it.

This kind of thing works if your buyers have cash to put down on the home. Ask for enough of a cash down payment that the buyers would be unwilling to walk away from the home. Sometimes the amount you'll want is 30 percent or even 40 percent of the purchase price of the home (hint: the lower your buyers' credit score, the higher the down payment you should require).

But in many cases, sellers don't ask for a large down payment or buyers don't have it. Now you have to assess a new risk: If your buyers put down very little money, your risk in having a buyer with almost no skin in the game in the current market environment might be quite a bit higher than the buyers' risk of losing a small down payment.

Your real estate attorney can walk you through the process if you decide to move forward, but I'd tread carefully.

I have been renting a house for seven years. The owner has refinanced the house two times as owner-occupied. Is this against the law?

When you fill out a mortgage application, the lender asks you if this is going to be an owner-occupied property. If you answer "Yes," you are telling the lender that you intend to move into the property and live there as your primary residence. If you answer "No," then you are signaling that this will be either a second home or an investment property.

Owner-occupied properties can get financing at a lower interest rate than investment properties, which typically are charged not only a higher interest rate but additional points and fees. At least some of the millions of investors who bought investment property over the past few years attempted to save money by claiming that the homes they were buying were going to be owner-occupied - even though they knew they weren't going to live there.

You're supposed to fill out the application truthfully. Any time you put anything down on a mortgage application that isn't true, you may be committing fraud against the lender.

However, even if you indicate that the property is going to be an owner-occupied property, plans can change. Just because you get an owner-occupied mortgage doesn't mean you cannot move into that home and later rent it out. It just means that when you close you are supposed to move into that home and treat it as your primary residence thereafter.

You are usually required to move into the home within 30 to 60 days of the settlement or closing date.

It would seem that if the owner lives in part of the property and you rent out part of the property, then he would be entitled to refinance the property with an owner-occupied loan. If you have lived there for seven years and the owner doesn't live on the property or in another floor of a 2- to 4-unit building, then perhaps not.

I wonder how you know that the owner has been refinancing and under what circumstances, and how you know that he told the lender that he was obtaining financing by claiming the property was owner-occupied.

Still, if the owner has been paying his mortgage on time and in full each month, most lenders won't care since they have so much else on their plates at the moment.

Finally, if your question is whether the owner of the property broke any laws in claiming that the property is owner-occupied when he knew it was not, that question would depend on the documents signed by the borrower, the laws in the state in which the property and the owner are located, and the banking and mortgage laws enacted by the United States. But in the end, that legal issue would best be answered by an attorney that deals with the enforcement of legal contracts and fraud issues.

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