Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
For this example, let's say a seller owns their house free and clear.
Buyer is prepared to put down 20% of selling price. 800 credit score. $250K income. No debt... yadda yadda
Agreed to selling price is $300K.
Appraisal comes in at $200K
Now I know that the obvious is for the buyer to call the seller crazy and to lower the price...but bear with me.
If both the seller and the buyer agree that the price of the home should be $300 for whatever reason, will the bank still lend 80% of the $200K with the seller offering their own financing on the remainder?
Math:
Buyer ready to put down $60K (20% of $300K)
$40K to bank downpayment.
$160 bank mortgage.
$20K cash to seller.
$80K seller mortgage.
=======
$300K total
For this example, let's say a seller owns their house free and clear.
Buyer is prepared to put down 20% of selling price. 800 credit score. $250K income. No debt... yadda yadda
Agreed to selling price is $300K.
Appraisal comes in at $200K
Now I know that the obvious is for the buyer to call the seller crazy and to lower the price...but bear with me.
If both the seller and the buyer agree that the price of the home should be $300 for whatever reason, will the bank still lend 80% of the $200K with the seller offering their own financing on the remainder?
Math:
Buyer ready to put down $60K (20% of $300K)
$40K to bank downpayment.
$160 bank mortgage.
$20K cash to seller.
$80K seller mortgage.
=======
$300K total
Probably not due to the CLTV. $240k in loans for a 200k Property, 120% CLTV
If the bank wants the ability to sell the loan in the secondary market, they will care. If they don't, they can do what ever they want. There are other regulator reason why they wouldn't want to lend.
A CLTV of 120% loan is an upside down property. Would a business want to lend on an upside down property? Things have changed from a few years ago. There is an immediate risk of the borrower walking away from the property and the 1st lender having to deal with a foreclosure.
And how is the property 'upside down'? In theory the property now has greater equity due to the second mortgage kicking in the additional money. The only danger I would see would be in using that property for a comparable in deterrmining value of future homes for sale in the area.
With the debt higher than the value, the property is more likely to go into foreclosure.
If the buyer has a life changing event, and needs to sell, the property is not liquid due to the debt burden.
Banks lend for buyers to amortize, not to foreclose.
And how is the property 'upside down'? In theory the property now has greater equity due to the second mortgage kicking in the additional money. The only danger I would see would be in using that property for a comparable in deterrmining value of future homes for sale in the area.
A property is consider 'upside down' when the total loans owed are more than the appraised value. Your theory is wrong. You do not build equity with more loans, you build more debt.
The reason I was hypothesizing that there would be higher equity was that the 1st mortgage would be dominant and that there was existing proof that the property was of higher than the appraised value because there had been a buyer at the higher price. But thanks for providing the 'conventional' wisdom.
So let's look at another situation (still hypothetical). Someone owns 30 acres with a house and stables and 4-car garage with work shop in a desirable area on the fringes of 'growth'. He wants to sell his property for 50% over the appraised value. The nextdoor neighbor is in secret negotiations with an investor to do some sort of fancy 1031 exchange. The investor does not have the cash to also buy the 30-acre property but knows that it will be worth much more in a couple of years so is willing to pay the extra 50%. The investor will be buying and living in the 30-acre property. Can he not get a loan for most of the cost of the 30 acres and do seller financing on the rest?
If the bank wants the ability to sell the loan in the secondary market, they will care. If they don't, they can do what ever they want. There are other regulator reason why they wouldn't want to lend.
A CLTV of 120% loan is an upside down property. Would a business want to lend on an upside down property? Things have changed from a few years ago. There is an immediate risk of the borrower walking away from the property and the 1st lender having to deal with a foreclosure.
What are these other regulatory reasons?
While I understand some of the "statistical" foreclosure arguments, can anyone verify that this is illegal, or not possible, or that no bank would do this under any circumstances?
I suppose there are other alternatives to get this done:
- A signature loan offered by the seller
- A signature loan offered by some other bank
- A loan offered by the seller pledging some other assets (if they desire collateral)
- A second mortgage by the seller immediately after the first mortgage closes
The reason I was hypothesizing that there would be higher equity was that the 1st mortgage would be dominant and that there was existing proof that the property was of higher than the appraised value because there had been a buyer at the higher price.
This seems to be a common misperception. Just because someone happens to pay a given amount for a property--even in an arms-length transaction--that does not mean that the price paid is the market value. People pay more, or less, than a property is worth all of the time.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
