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Finance > Real Estate > How Can a Homeowner Use "Subject to" Financing in Foreclosure?
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Article rating : 0.00, 0 votes. Author : Dave Dinkel
"Subject to" financing is where a homeowner sells his home but leaves the existing financing in place and allows the new owner to continue making the monthly payments. The deed is always transferred at this time to the new owner who will be making the payments. In the 1980's, lending institutions got legislation passed that stopped loans from being fully assumable by new buyers so the lenders could charge additional closing fees on the new loans.
The transfer of ownership violates the loan's "Due on Sale Clause" (DOSC), and immediately allows the lender to accelerate the loan and if the loan is not paid off, to initiate a foreclosure proceeding. But, if the homeowner is already in foreclosure, having a buyer offer to start making his loan payments, may appear to be a solution to his problem. This is a very common practice by real estate investors for using existing financing to save re-financing costs and greatly reduce the amount of money they need to buy the home.
The DOSC is what is known as a "contractual right" and is not a law. Consequently there is no "Due on Sale Jail" for the homeowner or the investor to be concerned about. Because of this limited penalty for violation of the DOSC (acceleration of the loan), and the fact that a check going through the lender's collection area is not checked against who owns the property or who wrote the check, few if any accelerations happen. In reality, should it really matter to the lender if his mortgage is being paid by the homeowner or someone else?
Well-meaning legislators in certain states are trying to enact "anti-investor" regulations to protect homeowners from investor abuses that would not allow "subject to" financings because in a few cases investors got deeds to properties but didn't pay the mortgages timely or at all once the deed was transferred. Some of these regulations are aimed squarely at "subject to" financing and lease options. Using "subject to" financing, the homeowner deeds over his home to an investor who
is supposed to begin making the monthly mortgage payments and pay the home's associated expenses.
The investor may have bought the property to flip it, rehab it and sell it, or rent it. But if something goes wrong, the investor may stop making the mortgage payment, not pay taxes or insurance and it may go back into foreclosure. Even worse, if the investor rents the property and collects the rent but doesn't pay the mortgage, the former homeowner is still responsible for the mortgage. Worst of all, is when the investor does pay the mortgage payments but consistently pays late. The result is a continuing credit score deduction for the former homeowner and the inability to finance a new home because he shows having another mortgage.
The former homeowner could call the lender and tell them that he sold his home and a new owner is responsible for the property. However, this is a terrible solution, because the investor owns the property, but the original homeowner is still responsible for the mortgage! If the lender accelerates the loan, the investor will stop paying the mortgage, collect the rent, and just abandon the property after he can no longer collect rent. The tenant loses their security deposit and last month's rent plus gets evicted, the former homeowner has a foreclosure and additional late payments on his credit report, the lender has a foreclosure to deal with, but the investor walks away with money in his pocket.
"Subject to" financing can work, but there are substantial risks to the homeowner, any tenants and the lender. There are numerous ways to protect the owner, lender, tenant and the investor, but they should be done before any deed is transferred. So be wary of an offer to use this form of financing and check any documents with your attorney.
About Author:
Dave Dinkel is the author of http://www.StopMyForeclosureMess.com "32 Ways to Quickly Stop Foreclosure and has helped thousands of foreclosure victims for nearly 33 years. If you are facing foreclosure, visit http://www.StopMyForeclosureMess.com StopMyForeclosureMess.com for guaranteed solutions.
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