Virtually every mortgage in the United States today has something called a due on sale clause. It makes the entire loan balance due and immediately payable in full if the property is sold or transferred. Just because a clause gives the lender those rights does not mean the lender will enforce them. Lenders spend a lot of money on advertising and incentives to get people to borrow money. The lender loses money if someone pays off a mortgage early, and then he or she has to find another borrower!
This situation is further complicated by the secondary market. Most loans that originate in one place are packaged with several other loans and sold to investors far away. The investors do not even make loans. If a mortgage paying 7% interest is paid off early, the investor has no choice but to take that money and buy government bonds earning 3% or so. The investor would be happier if the mortgage could be assumed by someone credit-worthy, who would continue making the planned mortgage payments.
The bottom line is, most holders of mortgages have large incentives to work with you. The servicing companies, who work for the larger secondary market investors, are working on obtaining more discretion to negotiate with people for loan assumptions. Both of these things mean it will become easier and easier to simply assume loans in the danger of foreclosure, usually with no down payment and very low closing expenses. Bear in mind, however, that you must make sure there are no other liens on the property. As always, obtain title insurance.
When most people talk about flipping foreclosures, they mean:
1. signing a purchase contract with the owner facing foreclosure so that the lender loses all its equity but at least avoids the bad consequences of a foreclosure; then,
2. working out a deal with the lender to accept less than the full amount due on the loan; then,
3. selling your purchase contract to someone else, with the sales price of the contract itself being pure profit to you; then,
4. the person who bought your purchase contract proceeds to closing and is able to buy property at deep discounts.
These are also called short sales. The part that depends on the lender accepting less money - coming up short in the cash department - is the key to the strategy. The plan requires a lot of legwork, as you track down someone with the authority to accept less than the full payment on the mortgage loan, and then find buyers to purchase your contract. On the upside, it is a way to begin investing with no cash, no credit, no partners, and no need to give up your day job.
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Note: This article was sent to us by: Wayne G. Cadill at 06282010
1. How to understand housing and economic development
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