Posted by Sean on March 23, 1999 at 10:56:42:
Yes, you can use your equity as a “down payment” but who are you going to give it to?
You said in your post that the Seller isn’t willing to hold any paper. If that is really the case (and I caution you here, because few Sellers will jump up and admit to being willing to carry some paper) then you’ve got problems. I would suggest talking to the Seller and exploring exactly how much they are willing to carry. No one would object if you offered to pay them half the purchase price at the close of escrow and the other half in 30 days, secured by a note and mortgage. On the other hand, few people will agree to a 99-year mortgage. Somewhere in between these two extremes your Seller will fall and it’s up to you to find out where.
The standard way to use equity as a down payment is to give a mortgage to the Seller in the amount of the down payment and get a bank loan for the balance. Admittedly not all banks will go for this, but some will. More importantly is to determine how much equity the Seller has. If your Seller owes 80% and you offer to get a new first mortgage for 80% and give him a 20% down payment in the form of a note and mortgage then how is he going to have the money to pay for escrow and his real estate agent, if any? That 80% loan will go to paying off his mortgage and he’ll have to come up with money out of his pocket to close escrow. That’s not that likely to happen! If, on the other hand, he owes 60% that 80% loan will put 20% cash in his pocket. Big difference.
Most likely your mother would need to be in on the deal, although you could try having your mother give YOU a note and mortgage and you give her a compensating unsecured note with the same terms. Most people wouldn’t go for that (I sure wouldn’t), but since you’re family maybe she would. This has the additional advantage that the note will be “seasoned” meaning the person will have a history of making payments. That makes the note a better risk.
Also I note that in your example the equity your mother has comes to only about a 17% down payment. This presents an additional hurdle. You’re on the right track though, keep thinking creatively!
A good way to present this idea to the Seller is to say you’ll give him a $25,000 down payment and get a loan for the rest. When he says ok, say you had in mind spreading the down payment out over a short period of time. When he asks how much time, try a number like 48 or 60 months. Many Sellers might try counter-offering only 12 or 24 months. In that case you’ve still got what you want; PROVIDED, HOWEVER, that the cash flow on the property will support a payment that large. At 7 percent interest on a $25,000 loan on a 24-month amortization you’d need to pay $1,112.82 a month and that’s a big chunk of change!! Maybe you could only pay $600 a month and have a balloon payment at the end of 24 months? That balloon payment would be over $13,000 though, so be sure you know where that money’s coming from, whether you’ll refinance to get it, or sell, or what.