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A Note About Brokers

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Posted On: 10/01/2008

Q:I'm a real-estate note broker. I sell deeds of trust, mortgages and help owners get equity out of their homes. I've been doing so for about four months now.

Investors are often associated with greed, unfair deals, fraud and scammers. I'm a broker who deals with investors and with mine this is not the case. How can I educate the public and real-estate agents regarding the good things that come out of relationships with note brokers and investors? Such as working with lower credit scores, helping to prevent foreclosure, helping to get equity out of homes and working with consumers when lenders turn their backs? With seller financing, once the seller has the note for about six to 12 months it can be a great option to sell it. That would be a win/win situation!

A: Having been in the business for all of four months it's unlikely that you've encountered the entire investment universe, but your larger point is generally on target: Most people, in most businesses, act fairly. Moreover, the pursuit of more profit, a bigger salary and more income is hardly restricted to note brokers.

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That said, given the availability of financing with little or nothing down, the need for seller notes is minimal. Most owners instead want cash at closing from the sale of their property so they can finance the purchase of a replacement home.

As it happens, long ago one of the first homes I bought was financed with a seller take-back. I put down 10 percent of the purchase price, assumed an existing first mortgage and the seller provided a substantial second loan.

I made every payment and ultimately repaid the seller's note in full. It was a great deal for me and worked well for the seller. Today such deals are history.

Mortgages are no longer "freely assumable," instead they either cannot be assumed or they're "qualified" assumptions, meaning that the new borrower must be acceptable to the lender. Lenders usually say no to such requests, but with today's growing foreclosure numbers more lenders might agree to assumptions.

In my transaction there was no note broker. The paperwork was written by the seller's attorney, reviewed by my lawyer and placed in the public records. The note was never sold.

Given the mortgage marketplace, we may see an increase in seller take-backs. However, since such loans usually are second mortgages, they are risky and selling such notes may not be possible without a steep discount.

Owners with an interest in taking back a loan should qualify buyers in the same way as lenders by requiring tax returns and other documentation. The loan should be in a form provided by the owner's lawyer. If a seller take-back is part of a purchase offer, acceptance of that offer should be contingent on a review of the borrower's finances which must be "satisfactory" to the seller. For specifics, owners should speak with a real-estate attorney before signing any paperwork.

Q: I would like to put my son and his wife on the title of a townhouse that I own. Does the mortgage company have the right to call the loan when this is done? Is there any way to avoid renegotiating a new loan for the outstanding principal due?

A: When there is "a transfer where the spouse or children of the borrower become an owner of the property," then a lender cannot use a due-on-sale clause to call the loan on a residential property, according to the Garn-St. Germain Act.

That said, there are other questions you need to ask in this situation.

First, can you simply add both your son and daughter-in-law to the title? Or must you add your son first and then his wife? (Your daughter-in-law is not your spouse or child, she is your son's spouse, and right now he's not on the title.)

Second, how should title be held? For instance, should there be an automatic right of survivorship?

Third, what happens if your son and his wife separate? These things do happen.

Fourth, what transfer taxes - potentially thousands of dollars - are involved in a title change? Ask if names can be added to the title in exchange for "good" consideration - not cash but instead love and affection. In this way there may be no transfer taxes to pay.

This is not a do-it-yourself job. Please see a real-estate attorney for specifics in your jurisdiction. Also, you, your son and his spouse should each have current wills and living wills.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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