Welcome!

By registering with us, you'll be able to discuss, share and private message with other members of our community.

SignUp Now!

Owner Financing

N

nubiwan

0
Registered
Joined
Aug 20, 2009
Messages
159
Considering putting up 5% (to cover down payment) as an incentive to sell my house which I just renovated in the last 6 months. How do lenders view this type of financing when considering an applicant who is borrowing the downpayment? My feeling is they don`t like it.

How can this best be managed with the lenders?

Willing to offer up to $15K towards a downpayment and take small monthly payments on that loan. Assume I attaced it as a second mortgage to the property.
 
QUOTE (nubiwan @ Sep 15 2010, 11:28 AM) Considering putting up 5% (to cover down payment) as an incentive to sell my house which I just renovated in the last 6 months. How do lenders view this type of financing when considering an applicant who is borrowing the downpayment? My feeling is they don`t like it.

How can this best be managed with the lenders?

Willing to offer up to $15K towards a downpayment and take small monthly payments on that loan. Assume I attaced it as a second mortgage to the property.


Its tough to say as it would really depend on the loan to value that the buyer is requesting. If they`re requesting a 95% mortgage, it might be tough though there may still be options. If they`re requesting a lower loan to value, shouldn`t be too much of an issue to allow a VTB behind the first.
 
QUOTE (nubiwan @ Sep 15 2010, 12:28 PM) Considering putting up 5% (to cover down payment) as an incentive to sell my house which I just renovated in the last 6 months. How do lenders view this type of financing when considering an applicant who is borrowing the downpayment? My feeling is they don`t like it.

How can this best be managed with the lenders?

Willing to offer up to $15K towards a downpayment and take small monthly payments on that loan. Assume I attaced it as a second mortgage to the property.

This is mortgage fraud in most cases.

95% ltv first time buyer program requires proof that the 5% comes from owner resources. The seller can`t `gift` this equity to a buyer. Bank wants to see that the buyer can come up with the 5% on their own or from someone that gifts it to them free and clear. These gift letters must be signed and they are generally checked by the underwriters at the bank and at CMHC.


I just don`t ever see any seller financing deals on the residential side because the buyers can get money a heck of a lot cheaper from the bank and it is a lot less complicated.

You can still offer other incentives outside of the down payment that can be quite attractive. Consider large gift certs to appliance stores, furniture stores, landscaping companies etc. Builders do it all the time.
 
QUOTE (RedlineBrett @ Sep 17 2010, 07:14 AM) This is mortgage fraud in most cases.

95% ltv first time buyer program requires proof that the 5% comes from owner resources. The seller can`t `gift` this equity to a buyer. Bank wants to see that the buyer can come up with the 5% on their own or from someone that gifts it to them free and clear. These gift letters must be signed and they are generally checked by the underwriters at the bank and at CMHC.

Sorry, but I don`t see why this would be considered mortgage fraud.

CMHC has a program called Flex Down. Borrowers with good credit history can actually borrow their down payment and and pay an additional 1.5% insurance premium. They still get discounted rates. It`s far better than some cashback programs that lenders have.

The lender will need the terms of the loan to calculate the tds.

This is not fraud if it`s a buyers principal residence.
 
QUOTE (RobMacdonald @ Sep 17 2010, 09:29 AM) Sorry, but I don`t see why this would be considered mortgage fraud.

CMHC has a program called Flex Down. Borrowers with good credit history can actually borrow their down payment and and pay an additional 1.5% insurance premium. They still get discounted rates. It`s far better than some cashback programs that lenders have.

The lender will need the terms of the loan to calculate the tds.

This is not fraud if it`s a buyers principal residence.

Definitely news to me. Would love some clarification on what needs to be in purchase contracts to have this fly.... As seller`s offering "cash back" incentives to skirt the downpayment required by banks has always been classic mortgage fraud. VTBs are even listed as a red flag with reca as sellers would privately agree with buyers to inflate the purchase price by 5% and then cash them back in a seperate transaction so that the buyer could get in zero down.

http://www.reca.ca/consumers/content/legis...-red-flags.html

What if the seller wants to offer 20% to avoid insurance premiums entirely?

I`ve seen and worked with 100% finance programs where the bank is the one lending the additional 5% but not where the seller does.
 
QUOTE (RedlineBrett @ Sep 17 2010, 11:48 AM) Definitely news to me. Would love some clarification on what needs to be in purchase contracts to have this fly.... As seller`s offering "cash back" incentives to skirt the downpayment required by banks has always been classic mortgage fraud. VTBs are even listed as a red flag with reca as sellers would privately agree with buyers to inflate the purchase price by 5% and then cash them back in a seperate transaction so that the buyer could get in zero down.

http://www.reca.ca/consumers/content/legis...-red-flags.html

What if the seller wants to offer 20% to avoid insurance premiums entirely?

I`ve seen and worked with 100% finance programs where the bank is the one lending the additional 5% but not where the seller does.

Here is the link to the CMHC Flex Down program.

http://www.cmhc-schl.gc.ca/en/co/moloin/fi...00_04-23-08.pdf

The program is available for principal residence and only up to 95% financing. Essentially, I don`t think it needs to be written in the sale contract as it is an actual loan from one party to another and would not essentially be a VTB. The loan is disclosed in the downpayment.

If the seller inflates the price to include the `loan amount`, then chances are that the value would not be accepted by CMHC in the underwriting of the mortgage.

When a buyer is applying for financing of a residence, it is completely different than previous rental property programs they have. The chances of default are far less for a residence versus a rental.

Purchase plus improvements, Flex Down, Family (2nd home) program are very good programs to name a few.
 
QUOTE (RedlineBrett @ Sep 17 2010, 11:48 AM) What if the seller wants to offer 20% to avoid insurance premiums entirely?

Once the loan is more than 5% of the purchase price, then normal guidelines apply and then the expectation of 10% of purchasers funds will apply.
 
QUOTE (RedlineBrett @ Sep 17 2010, 02:48 PM) . . . Would love some clarification on what needs to be in purchase contracts to have this fly.... As seller`s offering "cash back" incentives to skirt the downpayment required by banks has always been classic mortgage fraud. VTBs are even listed as a red flag with reca as sellers would privately agree with buyers to inflate the purchase price by 5% and then cash them back in a seperate transaction so that the buyer could get in zero down.
. . .


I think the question and issue of `fraud` in this case will depend very much on the framing, timing and mechanics of the deal. It may be one thing if it is a `substitute for the `down` another if it is strictly a generous VTB to augment the purchasers cash in.

A good lawyer could advise how to set this up and not run offside legally - lenders and CMHC perspectives are another issue.

Hope this opinion is a clarification and not off base.
 
QUOTE (RobMacdonald @ Sep 17 2010, 02:29 PM) Here is the link to the CMHC Flex Down program.

http://www.cmhc-schl.gc.ca/en/co/moloin/fi...00_04-23-08.pdf

The program is available for principal residence and only up to 95% financing. Essentially, I don`t think it needs to be written in the sale contract as it is an actual loan from one party to another and would not essentially be a VTB. The loan is disclosed in the downpayment.

If the seller inflates the price to include the `loan amount`, then chances are that the value would not be accepted by CMHC in the underwriting of the mortgage.

When a buyer is applying for financing of a residence, it is completely different than previous rental property programs they have. The chances of default are far less for a residence versus a rental.

Purchase plus improvements, Flex Down, Family (2nd home) program are very good programs to name a few.

Says this in the link:

"*Traditional Sources of Down Payment include: Applicant’s savings, RRSP withdrawal, funds borrowed against proven assets, sweat equity (< 50% of minimumrequired equity), land unencumbered, proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant
from federal, provincial or municipal agency).
** Non-traditional Sources of Down Payment include: Any source that is arm’s length to and not tied to the purchase or sale of the property such as
borrowed funds, gifts, 100% sweat equity and lender cash back incentives.."


I think this is meant to exclude any arrangement between buyer and seller. But I`m not a CMHC underwriter or a lawyer.

Have you done one of these deals Rob? What did the CMHC underwriter say about the loan doc and this term?
 
QUOTE (RedlineBrett @ Sep 20 2010, 07:26 AM) Says this in the link:

"*Traditional Sources of Down Payment include: Applicant`s savings, RRSP withdrawal, funds borrowed against proven assets, sweat equity (< 50% of minimumrequired equity), land unencumbered, proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant
from federal, provincial or municipal agency).
** Non-traditional Sources of Down Payment include: Any source that is arm`s length to and not tied to the purchase or sale of the property such as
borrowed funds, gifts, 100% sweat equity and lender cash back incentives.."


I think this is meant to exclude any arrangement between buyer and seller. But I`m not a CMHC underwriter or a lawyer.

Have you done one of these deals Rob? What did the CMHC underwriter say about the loan doc and this term?

Brett, yes I have done deals like like in the past, not many but have had situations here the borrower has got in for less than 5% of thier own funds, using an incentive in some way from the borrower to assist in closing.

In regards to the clause, it sometimes will come up but it depends on the borrower. If credit score is low, debt service ratios are near the limit, and they have no other assets, then I would expect CMHC would not be interested.

Non traditional sources of down payment has an additional .15% to the insurance premium. In a lot of cases, it depends on the lender you`re working with and whether or not they want to conclude the down payment is arm`s length or not.

In most cases, the incentive will be taken off the purchase price as a cash incentive, but if it`s being repaid as a loan I feel there is a valid arguement.
 
QUOTE (RedlineBrett @ Sep 17 2010, 11:44 AM) This is mortgage fraud in most cases.

95% ltv first time buyer program requires proof that the 5% comes from owner resources. The seller can`t `gift` this equity to a buyer. Bank wants to see that the buyer can come up with the 5% on their own or from someone that gifts it to them free and clear. These gift letters must be signed and they are generally checked by the underwriters at the bank and at CMHC.


I just don`t ever see any seller financing deals on the residential side because the buyers can get money a heck of a lot cheaper from the bank and it is a lot less complicated.

You can still offer other incentives outside of the down payment that can be quite attractive. Consider large gift certs to appliance stores, furniture stores, landscaping companies etc. Builders do it all the time.


So, for instance, If I gave a $10,000 allowance for decks and appliances, that could be considered a down payment or gift, of sorts?

Asumming I want to get $209,000 from the sale of my house (listed for $219K), how would I structure that?
 
QUOTE (nubiwan @ Sep 24 2010, 12:13 PM) So, for instance, If I gave a $10,000 allowance for decks and appliances, that could be considered a down payment or gift, of sorts?

Asumming I want to get $209,000 from the sale of my house (listed for $219K), how would I structure that?

Not really....... if an offer was presented for $219K, and the offer included the seller offering a $10K cash incentive for decks, then the CMHC and Genworth would deduct the incentive from the purchase price. So for the buyers, their downpayment would be calculated from $209,000.

However, if your borrowers put in an offer of $209,000, could put up the 5% downpayment, they could apply under the purchase plus improvements program. Once the deck and flooring (or whatever) is complete, the bank would then add the $10K onto the mortgage amount.

So, they put 5% down, roughly $10K. The new mortgage is $200K plus insurance premium. After the upgrades are done, the bank advances the amount of the estimate/quote, and the mortgage is now $210K plus insurance premium.
 
QUOTE (RobMacdonald @ Sep 24 2010, 07:27 PM) Not really....... if an offer was presented for $219K, and the offer included the seller offering a $10K cash incentive for decks, then the CMHC and Genworth would deduct the incentive from the purchase price. So for the buyers, their downpayment would be calculated from $209,000.

However, if your borrowers put in an offer of $209,000, could put up the 5% downpayment, they could apply under the purchase plus improvements program. Once the deck and flooring (or whatever) is complete, the bank would then add the $10K onto the mortgage amount.

So, they put 5% down, roughly $10K. The new mortgage is $200K plus insurance premium. After the upgrades are done, the bank advances the amount of the estimate/quote, and the mortgage is now $210K plus insurance premium.

I guess my point was that the buyer still needs to come up with 5% down. I am trying to work around that as they do not have it. Can the gift bes used towards the down? Assuming not from what I am reading.
 
QUOTE (nubiwan @ Sep 25 2010, 07:57 AM) I guess my point was that the buyer still needs to come up with 5% down. I am trying to work around that as they do not have it. Can the gift bes used towards the down? Assuming not from what I am reading.

No.
 
Suppose a buyer got approved for my $219K selling price but has no downpayment. My broker is willing to play ball and allow me to lend someone the 5% down. I`d lend the money and consider a small monthly payment ($100 perhaps), or even forgive the loan, if possible. I am willing to take $209K for the house. How might this be structured? What other considerations?

Thinking if I sold for $219K, lent 5% down, then walked with my $209-ish from the sale, I`d be happy. As this is a flip, I would have an income tax implication on the full amount of $219K. Yes? Can I write off the loan? Surely not.

Realize we are in grey (gray?) area here, but I am sure I am not the first to `assist` with a sale. Just like to know options before I did anything.
 
QUOTE (nubiwan @ Sep 30 2010, 04:20 AM) Realize we are in grey (gray?) area here, but I am sure I am not the first to `assist` with a sale. Just like to know options before I did anything.

It`s not grey it`s black. But it`s not you that will be doing anything wrong it`s the buyer... they have to prove to their lender (and CMHC) that they are coming up with 5% on their own. They will have to show it, liquid, at time of condition removal and many times they will be required to show a 90 day history on the funds or how they came to be in possession of them. Such is the world we live in now.

If your "buyer" doesn`t have 5% down and won`t qualify for 100% financing they are not fit to buy a house in the eyes of CMHC . I`d stop spending time with these guys and start marketing for a qualified buyer.
 
You must log in or register to reply here.
Back
Top Bottom