What is a Deed in Lieu of Foreclosure?

At Southern Loan Servicing, we are here to help you learn about your options and make seller financing more accessible. Today, we’re covering a deed in lieu of foreclosure, which can offer some security for hesitant sellers/lenders.

Here’s what you need to know:

  • A deed in lieu of foreclosure is a legal arrangement where the homeowner voluntarily transfers ownership of their property back to the lender in exchange for the cancellation of their remaining mortgage debt. This can be used if they fall behind on payments or are no longer able to purchase the property.
  • This option can help homeowners avoid the negative effects of foreclosure on their credit score, as lenders can view it more favorably.
  • With seller financed loans investors may use this as a tool in conjunction with a large down payment, and personal guarantee to show the lender they are good for the loan, and that the seller will regain title without having to go through a lengthy and expensive foreclosure if the buyer stops paying.  
  • It may not be available or feasible for all sales, as it requires the lender’s consent and may have tax implications. You should weigh the potential benefits and drawbacks before pursuing a deed in lieu of foreclosure.

You can find a more in-depth explanation and answers to frequently asked questions here

What is Escrow in a Mortgage?

When you enter into a mortgage whether from a bank or direct lender, an escrow account is opened to help you pay your property taxes and homeowner’s insurance premiums on time. Even though these are paid on an annual basis, the escrow is created so a monthly fraction towards each cost can accumulate in the escrow account. This way you don’t have to save for them separately because you make one monthly mortgage payment and part goes towards principal & interest and the tax & insurance annual payments.

When an owner financed loan is created don’t forget about the Escrows! This gives a bit of piece of mind for the seller as he knows an account has been established to keep these items paid. The loan servicer tracks these funds and adjusts the monthly payments from the buyer to account for changes to the annual bills.

When starting a new owner financed loan or private mortgage you’ll want to make sure the buyer knows that funds will have to be deposited into this account at closing, this is in addition to any down payments, earnest money, closing fees and insurance policies purchased up front. The sooner all of these funds are accounted for the better, nobody likes a surprise the day before closing!

learn more about Escrow Holdings Here

Are you wondering why you should work with a loan servicing company?

We’re excited to share a series of educational videos with you over the next few months that we hope will answer some key questions about working with Southern Loan Servicing!

Title Companies that work with our Loan Servicing company are able to offer their clients a better service experience. And get the closing on the front and back end of the transaction. Word of mouth and building relationships with your clients builds the trust they want and need for such an important time in their life.

What is a “subject to” mortgage?

This is a sale where the seller is not paying off the existing mortgage, but rather having the new buyer pay the mortgage obligations. That means the seller maintains the responsibility of paying off the loan, but the buyer has agreed to make mortgage payments on behalf of the original seller.

A great alternative financing option, a subject to mortgage can tip the scale in buyers’ favor, but only when carried out responsibly and with the proper knowledge of how to proceed. This also can work as a filler solution to a sale that needs a little more time/money/repair for traditional financing. Often misunderstood, subject to mortgages are not as complex as many initially assumed. If for nothing else, few people are actually aware of what a subject to mortgage is, but the answer is in the name. In its simplest form, the “subject to” in a subject to mortgage refers to the loan that’s already in place. When you purchase a property subject to, you are essentially buying the home subject to the existing mortgage — that’s really all there is to it.

Subject to strategies aren’t all that common, but you will find that they can be useful in certain circumstances. Distressed sellers, for example, may be willing to sell subject to if they want to rid themselves of a property immediately. On the other hand, buyers will tend to favor subject to when the interest rates on the existing loan are lower than the current market rates. Read more about it here.

How Natural Disasters are Influencing Housing Choices

A recent survey found that at least three-in-four buyers took natural disasters into consideration when they were choosing their new home.

A recent survey shows that many buyers consider natural disasters before choosing their next home. Here in Louisiana we are all too familiar with this, whether it be flood, hurricane, tornado or anything else mother nature throws at us. But we are not alone, homeowners also worried about severe cold or winter storms, (hello Texas 2020/2021) wildfires, droughts and sinkholes.

Being prepared for the types of storms or natural disasters that may occur in a given area can help mitigate damage and even potentially save lives. The first step to preparedness is to find out what types of disasters are more likely to hit your area, then take steps to prepare the ones you’re most at risk for. Many different types of disasters can have similar consequences and can be prepared for in similar ways. This can make some steps universal regardless of where you live. Take steps to prepare for disasters and help home and business owners protect their properties to minimize damage and damage related costs the next time disaster strikes.  

Should I request a home inspection?

Don’t be afraid to request a home inspection. 🙅 You could potentially avoid thousands (or more) in unexpected repairs after closing, along with the possibility of overpaying for your new home. ➡️ Have you heard of a home inspection contingency? This is an addendum to the offer that allows the buyer to conduct an inspection, and then, back out of the deal if they are unsatisfied with the findings.

A good example of how this would play into owner-financed purchase is if the home needs repairs a traditional mortgage lender may not approve the home for financing. You can still save the sale by going the owner-financed route and refinance after the repairs have been completed.

A good home inspector looks at the structure of the home, the plumbing and electricity, air conditioner/heater, kitchen and appliances, attic, roof, gutters and windows. After getting the report back you can assess what items that may need repairs, or items are not up to code, thus giving you an action plan to discuss with your real estate agent.

If the seller ignores your concerns about the repairs–such as refusing to fix them or pay for you to do it–it might be time to back out of the purchase contract as long as you have a proper contingency. If you’re able to negotiate with the seller on the most important repairs and end up moving in, the inspection report can help guide the initial repairs you need to make in the home.

A home inspection is a straightforward way to get a professional, third-party review of the condition of the house you’re about to buy. Although it can be disappointing to find out the home you want is in a state of disrepair, it’s best to confirm that before you finalize the purchase and move in, only to find out you’re on the hook for more money than you bargained for.

To learn more about the importance of home inspections, read this article:https://www.forbes.com/advisor/mortgages/home-inspection/?fbclid=IwAR213zAaG2KSefIe-pSzxf6MMa8zZ13LG5xxJD0fmvlldWKaofB06djLi1Y

What is a wraparound mortgage? 🤔

It’s a type of seller financing offered by homeowners who still have a mortgage on their home. Although this isn’t common in today’s market, it could make a comeback when interest rates rise in the future.

People often confuse this type of purchase with a Land Contract/Contract for Deed or Bond for Deed. The major difference is with a wraparound mortgage the seller is no longer listed as an owner of the property; however, they do remain on the original mortgage. Seller sets the terms of the new loan so that the buyer is making a monthly payment that is higher than the payment due on the existing mortgage. Therefore, the buyer is making a payment which is used to pay the mortgage, thus the “Wraparound.” The difference between their payment and sellers’ mortgage payment is seller’s profit. To avoid risk of the seller not paying the mortgage and the homebuyer having the home foreclosed is to use a reputable loan servicing company to work on behalf of both party’s interest. Southern Loan Servicing’s staff, software, affiliated companies, and long history allow you to trust that we can structure, administer, and close out your owner-financed transaction efficiently and accurately.

Borrower Default

The seller has also taken on all of the risk of a traditional lender in a wrap around mortgage.  If the borrower doesn’t pay, the seller bears all the costs associated with enforcing the loan or foreclosing.

Additionally, if the borrower doesn’t pay, the seller is then at risk of being unable to pay his mortgage and could face foreclosure. This can occur even though the borrower is causing the problem by not paying. The wrap around is a second mortgage and as such is in a second position for enforcement. If the seller cannot pay the first mortgage, even when it is the home buyers fault, the original mortgage lender has the first claim and can foreclose on the original home owner.

Lender Default

Risks of a wrap around mortgage are not limited to the seller. The buyer faces default risk as well. As an example, if a buyer consistently makes monthly payments, but the seller is not then paying the first mortgage, the original mortgage lender can foreclose on the home. *Using a loan servicer can prevent this*

Learn about the pros and cons of this type of seller financing here. ⬇️

Owner Financing- how do we get started?

  • Buyer and Seller complete a purchase agreement / sales contract. One can be provided if needed.
  •  Buyer has the option for home inspection, appraisal and abstract (title search) to verify there are no liens, wills, mortgages, or other documents affecting title to the property. This is when verification of the legal owner is made, and all the debts owed against the property are determined.  Buyer typically pays for inspections and appraisals and should note if they waive this option.
  • Insurance needs are established, buyer should price out for new policies and obtain quotes based on sellers’ requirements.
  • Law office or title company should be given all quotes to add to the settlement statement, this includes the servicing companies’ fees, as they should be included with settlement costs.  Property insurance and pro-rated taxes are added to the settlement statement or paid before signing.
  • Escrow/settlement officer oversees closing of transaction. Seller signs deed then buyer signs new mortgage. Seller, real estate professionals, attorneys and other parties to the transaction are paid. Documents are recorded in the county/parish in which the property is located.
  • All sales documents are forwarded over to the loan servicing company, this should include copies or original promissory note, mortgage, terms of loan, copies of insurance documents and tax information.  Signed servicing agreement and contact information must be included.