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We have an opportunity to purchase a single family rental property directly across the street from our home. The seller is also a neighbor. They have substantial equity in the property, but I'm assuming there is still a mortgage balance. Non owner-occupied investment property financing requires a 20% or 25% down payment. I'm confident we will qualify for financing, and we do have the down payment cash available. I'm just not so keen on tying up the entire sum in the investment. I think there is good possibility that the sellers would agree to finance some of their equity....
My thought is that we would offer the seller something close to the asking price in exchange for their agreement to write us a 2nd mortgage, after we close on a traditional 1st mortgage with a bank. We'd ask for market rate, but throw in a 10 year balloon or something similar. That way, we'd effectively be getting some of our down payment back, to hold in a property maintenance reserve, with a reasonable cost of money which we should mostly be able to offset.
My questions: How would the bank (1st mortgage holder) view a deal like that? Ideally, I'd like to see the whole thing (1st mortgage and plans for an owner-financed 2nd mortgage) as part of the financing contingency clause in the Purchase and Sale agreement. I'm just not sure how the bank would view that. I think the seller is willing to work with me, and would probably take an offer like that. But I wouldn't ask them to do anything illegal, or "sneaky".
Well, I think they'd probably be pretty unhappy if you dont disclose it - which is what your intending to do (or NOT do). You can always get a loan after your mortgage passes - but to do an agreement before you get your loan, you'd have to disclose it because you have a liability that you're working out.
Think about it - banks are now asking why you have extra money in your account.. why you have an extra $100 on your credit cards from the time you applied for a mortgage to the time you were done with under writing.
That said - this just doesnt sound like a financially smart decision. On a market rate for a second mortgage, you're looking at about 8%. Holding it in your account, you'd get about 1%. Why not just ask your neighbor or a bank for a loan when/if you actually need it? Doesnt make sense to pay interest on a loan just to have it sitting there in the event you may potentially need it.
I'm not a financial advisor or a lawyer.. but, yes, you need to disclose this to the bank.. and, chances are, they wont approve your loan with it.
Well, I meant more like 1st mortgage market rate, but you're probably right. The numbers do work in terms of the rental/debt service (on both the 1st and 2nd). I just wanted to effectively reduce that downpayment to 10% say, instead of 25%... not tying up the whole thing in a long term investment, retaining some opportunity with that cash, rolling the dice that over time I could do better than the 5% I'd be paying on it.
I guess it's fair to say there are few realistic seller financing possibilities when the seller still has a mortgage to payoff, and the buyer doesn't have the cash (ie needs a loan). Most of the sweetheart owner-finance deals you hear about happen when the owner is free and clear. I suppose if the seller's mortgage is 25% LTV or less, and he's willing to finance, there might be some advantages trying that route.
Nothing is stopping you from getting a loan and then after the fact borrowing money from your neighbor... but if that is part of the sales agreement - you're going to have to disclose it.
Also - there has got to be an option here... and you should talk with a broker in your state. I could see this being possible for you to get a loan for the owners balance and then make payments to the owner for the balance.. but a bank or broker would no better on how to facilitate that.
Basically - there is going to be a solution out there.. just need to speak with a pro in your state.
If the 2nd loan, or the seller's intention to give a 2nd loan is a condition on the Purchase and Sale, then obviously the bank will see it, and probably not approve the first mortgage. If the buyer and the seller have a mere verbal agreement to do a 2nd loan after the closing, would the buyer be obligated to disclose it at the time of the 1st loan, or on the Purchase and Sale? I guess that's the question.
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