FSOB and Real Estate forms: Loan Assumption Addendum; Seller Financing Addendum


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Loan Assumption Addendum

The Loan Assumption Addendum provides a greater level of detail to those buyers who may desire to assume a loan held by the seller. The form includes provisions for verification of the buyer’s creditworthiness by requesting such information from the buyer as a credit report, verification of employment, and verification of funds available for the down payment. Although this particular addendum grants sole discretion to the seller to determine the buyer’s creditworthiness, more often than not it is the mortgage company that has sole discretion. Most lenders incorporate into their mortgage documents a due-on-sale clause that may preclude the transfer of title rough a loan assumption. Years ago, when interest rates were much more stable, loan assumptions were very common and due-on-sale clauses were rarely seen. Today, however, while the ability to assume a loan still exists, it generally requires the lender’s review and approval of the new borrower. Moreover, the lender typically charges an origination fee just as if it were a new loan. Often, lenders have the right to adjust the interest rate at their sole discretion if the loan is assumed, so it may be just as easy for your buyer to get a new loan as it is to assume an existing one. While there’s a good chance your existing loan may not be assumable, you should nevertheless be aware that such a form exists and is available to facilitate the transfer of the note from one owner to the next.

Seller Financing Addendum

A homeowner’s willingness to provide seller financing is one of the best ways I know to get a house sold. In many instances, buyers do not have adequate savings to purchase a house and, without the aid of a seller, they would he unable to do so. For those readers who may not be familiar with the way seller financing works, allow me to share an example with you. I recently sold an investment property of mine for $65,000 to a woman who was a first-time homeowner. Because she had a low credit rating, she was only able to qualify for a 90 percent loan, which in this case amounted to $58,500. The lender would allow a seller carry back for the remaining 10 percent, or $6,500. A seller carry back is the same thing as seller financing. I agreed to carry the note at a rate of 12 percent interest for a period of one year, after which time she would attempt to refinance the property at 100

Percent so that she could repay me. While you may think a rate of 12 percent is a bit on the high side, perhaps even usurious, I charge what the market will bear. In this situation, the woman purchasing my house had lousy credit. My willingness to provide her with seller financing allowed this lifetime apartment renter to participate in the American dream by becoming a homeowner. After only one year, she can refinance and get a more favorable rate.

The Seller Financing Addendum is similar to the other financing addenda in that it demands sufficient credit documentation to be furnished by the buyer. The primary difference here, however, is that since the seller is the one providing the financing, he or she will have sole discretion of determining the creditworthiness of the buyer. This addendum also contains a provision enabling the parties to outline the terms and conditions of the promissory note that will be created for the seller financing. The note provides for a choice of either a single payment, also known as a balloon payment; a standard note amortized over a predetermined period of time; or an initially interest-only note that then changes to an interest-plus-principal note that continues until the note is repaid in full. Although the repayment arrangements in this promissory note section offer buyers and sellers a limited number of ways to structure debt payments, they are some of the more common methods preferred. The repayment of debt can be structured in whatever ways the parties choose to agree upon and are by no means limited to the methods illustrated here.

In the next section of this form, it is the Seller Financing Addendum that provides for the deed of trust or mortgage that is used to secure the note. The Seller Financing Addendum may furthermore grant the right to the buyer to sell the property without prior consent of the seller, or it may instead require consent. As the seller carrying the note, I recommend adding a provision similar to a due-on-sale clause that would preclude the buyer from selling the property without first paying off the underlying obligation to the seller. This gives the buyer the flexibility he or she is seeking for the purchase of your house, while leaving you in control. Like the bank, you can either grant or deny the assumption of the note to another buyer. If the provision is included, as the seller you will then have the option of being cashed out if the property is sold before the note to you has been fully repaid.

Finally, the Seller Financing Addendum contains a provision for escrow payments for taxes and insurance that may or may not be required by you as the seller. If you are only carrying a small note, say less than 10 percent, then in all likelihood you will not set up an escrow account. I do recommend, however, that proof of annual or semiannual tax and insurance payments be provided to you as evidence that the payments have been made and do not become delinquent. If, on the other hand, you are carrying the entire note and there is no other lender involved, you will more than likely want to set up an escrow account so that the taxes and insurance can be paid when they become due.

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