To eliminate the mortgage contingency the parties
could execute a "cash contract" in which there is
no reference to buyer financing and the mortgage clauses are
deleted. Note that a "cash contract" does not require
the buyer to pay all cash, it just means that the buyer is
not entitled to the return of his deposit if he doesn't obtain
a mortgage commitment.
Seller Financing: can make a property especially appealing
to a buyer as there is no qualification process and the closing
costs are usually less. The seller is entitled to act as the
buyer's mortgage company and loan the buyer any part of the
purchase price. The seller's attorney then prepares a note
and a mortgage, which is recorded, in the same manner as a
conventional loan. Some contracts require the seller to use
a "conventional" mortgage. The seller should not
use a conventional mortgage unless the seller is a bank. The
seller should not use a form mortgage. The seller should use
a mortgage specifically drafted for the needs of an individual
acting as a lender. Your real estate attorney can provide
you with a suitable one.
If the buyer subsequently fails to make the
required payments, the Seller can foreclose the mortgage in
the same manner as a conventional mortgage company and recover
title to the property. The seller should be sure that the
buyer pays enough cash to cover the costs of a foreclosure
action plus nine months of carry. Sellers should note that
if the buyer declares bankruptcy it does not prevent a foreclosure,
it only delays it.
Assuming an existing mortgage: if the seller
already has a mortgage on the property, the buyer might be
able to assume it. In this case the buyer contacts the existing
mortgage company which will state the conditions and cost
of assuming the loan. The buyer will then execute an "assumption"
which will be recorded and make the buyer liable on the note.
The seller is usually relived of further liability on the
note. The buyer should remember to add himself as a loss payee
on the property insurance and delete the seller.
Subject to an existing mortgage: means the buyer
purchases the property from the seller and does not pay off
the seller's mortgage and does not assume it either. Many
mistakenly believe this is illegal. The resulting status is
as follows: the seller is still personally liable on the note,
the mortgage still shows on the seller's credit, the mortgage
is still a lien against the property, the lender has the option
of declaring the note to be immediately due in full.
Wrap Around Mortgage: the existing mortgage
remains and the seller lends the buyer an additional amount
the total amount secured by a mortgage from the buyer to the
seller. The buyer's entire payment is made to the seller,
who makes the payment to the pre-existing mortgage. This protects
the seller who is personally liable under the first mortgage.
The buyer is at risk to the seller not paying the underlying
mortgage. If the parties have not obtained the consent of
the underlying mortgage to do a wrap around mortgager, then
the underlying mortgages will probably have the right to declare
that note immediately due in full. [..cont..]
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