Before I started reading CREONLINE.COM, I foolishly told the lender that I was the new owner. I lost the property on foreclosure–wiped out. This is why I recommend that you have your property seller deed the property into a trust, record that, and then have an unrecorded assignment of beneficial interest in the trust to yourself. You might want to search the archives of this site for “sj to,” “trust,” “DOSC,” and “due on sale clause.”
First let me say I know next to NOTHING on Sub2.
But am learning…so…ahem…
My gist is for people selling Sub2 in a low equity situation and needing to buy another home soon in (perhaps in another location such as business transferees).
How does the Sub2 affect the sellers income ratio, from a financers perspective?
Isnt it risky to discuss your position in this to another financier who may inquire of all parties when performing “discovery” of a sellers assets when Sub2 seller tries to get another loan for his next home?
Regarding #1, FHA allows 75% of “rental” income. Commercial lending allows up to 90% of same. When the seller goes to buy another home and justify your Sub2 as a net zero on income ratio, what does the seller call this income (rental income?) and what percentage would be expected to be allowable as offsetting to the mortgage he still holds on the Sub2 property?
Regarding #2, #1 comes into play largely when income ratios are used to justify your loan-a-bility from an income standpoint. If they use the asset standpoint to validate you, I have seen them call for stringent verification of ALL assets, contacting many of the parties associated with these assets. The risk is obvious if they call the Sub2 property lender and discuss the issues. Has anyone seen any of this?
If the new lender treats it more like a rental they will only allow 75% of the payments to offset the buyers income. If they treat as a sale, which it is, then they will allow 100% of the payments which would be a wash on the borrowers debt ratios.
I haven’t heard of any lenders contacting the other lender about this. The borrower should only need to show the lender a copy of the contract showing the property has been sold.
The only time this can really become a problem is if the borrower tries to get new financing through the same lender. So always make sure they understand they need to get any new loans through another lender other than the one they have this loan through.
In most cases these buyers won’t be buying anything soon since they couldn’t afford the property they had which is the reaon they had to get rid of it in the first place. However there will be cases where you have a seller that needs to sell fast because they are relocating and will be buying another home. So in those cases the worst case is their lender will only allow 75% of the payment amount to be used to offset their debt ratios.
It’s no different than someone selling on a L/O or contract for deed and buying another home.
Only on a L/O they will almost always count it as rental income by allowing 75%.
When a contract for deed is involved they will usually allow 100% since they consider that a sale.
Sorry, this is not an area in which I have much expertise.
I have a couple of houses which I took over subject to in 1988 and still hold. I had one on which CountryWide lending called the loan due on sale and foreclosed upon me. I thus suggest always hiding the sale from the lender.
Johnboy,
Having purchased MANY houses sub2, I agree with what you said, to a point, which was;
“The borrower should only need to show the lender a copy of the contract showing the property has been sold.”
SHOULD being the KEY WORD in that statement.
However, many times when showing a lender a contract, I’ve found that they often ask for a “settlment statement”.
Hence the reason I’ve now made it part of my sub2 doc package to type up a HUD-1 statement with each and every sub2 deal.
While this does not work 100% of the time, I’ve found that it increases the chance of the new lender giving a 100% offset to the debt to income ratio.
Ron, you mentioned in this post that you had a home that was financed by Countrywide and they called the loan and foreclosed on you. Out of curiosity since I am a beginner and am interested in subject to’s, were they willing to negotiate with you to refinance or assume the mortgage. What was the overall outcome? How did they find out?