     Shelby Hrcek (Shelby) | Monday, April 23, 2001 - 10:24 pm 
My husband and I are considering buying a house with owner financing. We don't know much at all about owner financing. We are first time buyers. We cannot qualify at this time for mortgage but should be able to in 1 to 2 years. The sellers are willing to finance the house with a small down payment. We have a few questions....will we be able to get the tax credit for owning a home? There will be a balloon payment in 2-5 years at which time we will refinance but during the owner financing time will this show up on our credit? We need to rebuild our credit to qualify to refinance so it is important that this is reported. Is there a way to do this? Thanks in advance! |
| Christine Baker (Admin) | Tuesday, April 24, 2001 - 09:47 am
Don't do it unless you have AT LEAST 5 years to the balloon payment AND you know for SURE that you'll be able to pay it.
Owner financing will NOT be reported to the bureaus and yes, you do get the tax write-off.
Not knowing your situation and credit, I can't really make any recommendations, but more often than not people can't refinance later. |
| Don Semler (Dsemler) | Tuesday, April 24, 2001 - 05:29 pm
Christine,
They may not get the tax write off as most "investors" will structure this as a Lease option or Land contract and will not file 1098's but claim it as a rental until the buyer completes the option.
If the buyer can get put in title and have the owner carry a true mortgage then they get the write off.
These deals are generally favored towards the owner as about 70% of the time the buyer never completes or is unable to complete the deal and thus loses their down.
i agree with you on getting 5 years, but better yet try and get the deed in your name. |
| Christine Baker (Admin) | Tuesday, April 24, 2001 - 07:45 pm
I'm not familiar with land contracts at all, we didn't do those in California. So when I hear that an owner finances I expect that they carry a mortgage and title will transfer.
I always heard that land contracts work well for sellers in some States, but that's about all I know. |
| Shelby Hrcek (Shelby) | Tuesday, April 24, 2001 - 09:14 pm
This deal would be a real estate contract with a wrap around mortgage. We asked our real estate agent these specific questions and he said that we would get the tax advantages as a homeowner. He also asked the listing agent about it being reported on our credit and she said that the seller would be reporting it to the credit bureaus. Can he do this as an individual and not a bank?
Christine - why do you say not to do it unless we get at least 5 years on the balloon payment? We were thinking the sooner the better so we can get a better interest rate. We were going to write it up as a 4year balloon but with the option of refinancing and cashing out the buyer as soon as 18 months with no prepayment penalty. We feel confident that we can qualify in 1 to 2 years...we just have some credit issues to work out but we want to give ourselves up to 4 years just in case. |
| Christine Baker (Admin) | Wednesday, April 25, 2001 - 09:24 am
It's great to have the OPTION to refi sooner, that's different from a 2 year balloon.
I wasn't aware that the seller added a prepayment penalty. That's very unusual too. Normally they like to get paid ASAP, unless they're in the business of TAKING THE PROPERTY BACK and selling it over and over. I see that a lot with rural land -- $100 down and $100/month, the buyers walk after a few months/years and the seller sells it to the next sucker.
So, that prepay penalty worries me.
... we just have some credit issues to work out but we want to give ourselves up to 4 years just in case.
How do you know the property will appraise in a few years?
You mention a wraparound - so there's an underlying mortgage.
Did THAT lender ok the deal?
I've only done this once - the lender found out about the sale and called the loan, i.e. foreclosed.
The listing agent tells you that the loan will be reported. It could be true, if the seller is in the lending business.
It would be very unusual for a seller to report the loan to the CRAs, did you get it in writing?
And I have NO idea what the IRS position on land contract mortgage deductions is.
Here is something VERY important:
This topic started out with My husband and I are considering buying a house with owner financing.
I thought that you were BUYING a house.
Fortunately Don picked up on the fact that you weren't buying a house at all, you want to CONTRACT to buy a house. You forgot ONE word, it makes a HUGE difference!
It's the same in the credit section where people often don't know those little but most important differences. There are tremendous limits to this (or any other) forum.
I KNOW that a lot of people get bad advice based on inaccurate or downright wrong info posted here.
It's the GIGO concept - garbage in, garbage out.
You should take the PROPOSED contract, BEFORE signing, and have it reviewed by someone who'll explain it to you.
Unfortunately, you probably don't know anyone who is qualified, both your agent and the listing agent do NOT have YOUR best interest in mind, they want their commission.
If you're in a small town, the real estate attorneys probably do biz with the real estate people involved and don't want to kill the deal.
I have no solution, MAYBE you could find a broker willing to charge for a couple of hours to review the contract.
Shelby, you're certainly welcome to post follow-up questions.
I just want to make sure that everybody (lots of people read this) understands that this forum is by no means a substitute for professional advice.
I haven't seen your contract, I don't even know what State you're in.
You might want to have your agent write up your offer and then post it here (black out personal info and address) - at least we'd all know what we're talking about. |
| Shelby Hrcek (Shelby) | Wednesday, April 25, 2001 - 11:38 am
I think you misunderstood one of my post. They did not put in a prepayment penalty. We asked for no prepayment penalty so that we could refi. as soon as we are able to. We only put this in because with some sub prime mortgages there are prepayment penalties if you refi. before a certain time. We didn't want that to be the case in our situation....we wanted the option of refinancing as soon as we are able to without having a penalty. I do not know if the seller's lender has approved the deal....but it sounds like we should find out and should only do it with their approval....is that correct? I did talk to an escrow officer that my agent referred me to to explain the real estate contract to me. I asked her some of the same questions I've asked here. My main question for her was how will we know that the seller is making his mortgage payments. That concerns us and we want to find our what happens if he does not and the first lender tries to foreclose. She said the real estate contract states that we have the right to make those payments thus avoid foreclosure but was unsure about the notification procedures. We don't want to end up finding our that they are 2-3 months behind and the lender is going to foreclose if we don't catch up on all his payments. She also suggested that we could set up collection agency (bank) to collect our payments and give them instructions to pay the first mortgage out of our payment and then pay the difference to the seller. This would then ensure that the first mortgage was paid.
Also the seller is not in the lending business that I am aware of so the credit reporting is still a concern. We will request to get that in writing. I will talk to my husband about posting the offer here. Thanks for all your advice! |
| Christine Baker (Admin) | Wednesday, April 25, 2001 - 01:46 pm
They did not put in a prepayment penalty.
If there is no prepayment penalty, you don't want to limit yourself to not being able to prepay at ANY time.
We only put this in because with some sub prime mortgages there are prepayment penalties ...
That makes no sense to me. What other lenders do is not relevant. MANY mortgages have prepayment penalties, especially the "no cost" loans. HOWEVER, does the seller's mortgage have a prepayment penalty, and if yes, who pays it?
I do not know if the seller's lender has approved the deal....but it sounds like we should find out and should only do it with their approval....is that correct?
You should ask the seller whether there is the possibility of the lender calling the loan and if yes, you need to negotiate who will get a new loan and who pays the expenses. If YOU can't get the loan then, what will happen?
You got some good advice from the escrow agent about the payments being made to a 3rd party. But keep in mind that the escrow officer's CLIENT is the real estate agent who brings the business NOT you. Their job is to put you at ease and make you close. They ALL get paid when you close.
Why isn't your agent explaining everything to you? It is truly amazing that so much incompetence is legal, these people are licensed to be idiots. |
| Don Semler (Dsemler) | Wednesday, April 25, 2001 - 02:30 pm
Shelby,
Are you in CA. Based on what you've listed, my guess is either FL or CA.
Thre reason i ask is states can be different on how they treat these deals.
I don't like the fact the you stated it was a "real estate contract with a wrap around mortgage". This doesn't answer my original concern if title will be place in your name. You want the deed!!!
Also, you want the payments serviced by someone. If it cost money, pay it. You don't want the seller handling the transaction to the underlying lender. You also want to investigate a "novation" agreement. This is the underlying lenders approval. Without their aprroval you a are a sitting duck for a "due on sale clause".
You have a better chance with the lender allowing your transaction if the underlying loan is either at a higher than market rate or an ARM. Also, i agree with Christine on the 5 year term with the option to pay it off whenever you want.
You also want to clause that deals with the issue if financing is unatractive in 5 years. Such as an extention at a rate of prime + ???. You don't want to get down the road and find out that you can't get financing and loose everything. Agree on it now so you don't get screwed later.
Cover everything now so you don't have problems later. Don't believe the agents!!! The clause about you "having the right to make the payments" only applies when the seller has defaulted. Problem is that you may not find this out until they are down 2-3 months. Then you have to come up with the money to bring it current and save you home and if the lender didn't know you were involved now they can call your loan due.
If you do not take title, make sure you at least fiel a request of for notice of deliquency or default.
Good luck. |
| Shelby Hrcek (Shelby) | Thursday, April 26, 2001 - 08:55 pm
Thank you so much for your advice Christine and Don. I truly appreciate it! By the way, I am in Washington. |
