In a down economy, when getting home financing can be so difficult, getting seller financing is often a great way to help each party involved on both sides of the deal. One type of seller-assisted financing is the blanket mortgage. In a blanket mortgage, the seller will have equity in their home at the time of sale, and will ask the borrower to pay it directly, continue to pay on their mortgage, and get the remainder to cover the equity they allowed the borrower to finance. . sounds puzzling? Click the link above for a more detailed breakdown of how these things work.
In a faltering economy, with financing so difficult, more and more people – sellers and borrowers – want to take the “turnaround” approach. While this type of financing certainly has its advantages, it certainly has its drawbacks as well, and these drawbacks are not small.
Let’s get this party started by listing the pros:
1. In many cases the borrower is creditworthy, but illiquid tight credit markets offer financing only to those with perfect credit history, income and savings. Having trouble getting financing makes the tough market even worse for those looking to separate from their home. A blanket mortgage basically allows the seller to call the shots when it comes to who can and can’t buy their home.
2. The ability to obtain seller financing, when direct bank financing is simply not an option, as detailed above, is certainly a huge plus for both parties. Additionally, if rates have risen significantly since the seller took out their original loan, this mortgage can allow the buyer to pay a lower-than-market rate, in addition to the buyer. The seller will maintain a higher price, compared to when he negotiated his initial financing, so he can keep the spread, which is a big plus for the seller. For example, the seller’s 30-year fixed initial rate was 5%, but the current 30-year fixed average is 7%. The seller charges the borrower 6%, the seller keeps the additional 1%, and the borrower pays 1% less than he would have paid, if he were to have had the traditional means of financing. win win!
If it sounds too good to be true, it probably is – Con time:
1. If the seller does not have a prospective mortgage, and el banco discovers that they have deeded their property to someone else, but have not required a mortgage by a new party, they may “loan ask” and foreclose on the property. Perhaps the borrower is making payments, but is being evicted from their home. In a tough market when people don’t make their payments, banks become (not surprisingly) less concerned with the source of the payment, and more concerned with whether the payment is being made. So don’t expect this to be enforced if the mortgage is updated.
2. If the bank has a “due for sale” clause, and it is not disclosed to the bank that the property has changed hands, the same problem can occur as mentioned in #1. The borrower is currently paying off the loan, but the seller never told the bank to sell, then the bank gets angry Mama closes the foreclosure. The poor borrower lives in an A-box for a few months after moving into their new home and pays the seller on time each month.
3. The biggest concern/disadvantage for the seller is that the borrower does not pay the mortgage on time. One advantage of assuming a wrap versus a direct mortgage is that the seller at least knows when the borrower is delinquent and can repay the bank for the borrower. However, in such a situation, the seller is essentially paying for someone else to live in the house. Not entertaining.
4. Some “wraps” have the seller either pay the bank directly or through a third party. If this is the case, and the borrower falls behind, the seller has suffered credit damage and risks losing the home.
Covers are great if both parties stick to the rules. It is important for both the borrower and the seller to know the risks of “going around” and to make appropriate preparations to mitigate them.