No Down Payment Opportunity

In some cases, it is possible to turn an assumption transaction into a no down payment purchase. This can be done by signing a promissory note to the seller for the down payment amount.

The current mortgage is still assumed as normal. However, the balance of the purchase price is owed (instead of immediately paid) to the seller. The seller does become the lender of a second mortgage on the property. At the closing, the buyer will only have to come up with enough funds for the closing costs.

The important selling point of this approach is that a year later, the buyer can refinance the mortgages and consolidate both loans into one new loan. That consolidation refinance will pay off the balance owed to the seller and remove any risk that the original seller was carrying.

For example, consider this example scenario of Jim buying a house from his aunt Martha:

They agree on a sales price of $90,000.

  1. Aunt Martha has a mortgage balance of $70,000 that Jim will assume.
  2. Jim doesn't have the $20,000 balance. In fact, he barely has enough to cover the projected closing costs of $2,500. So Aunt Martha accepts a promissory note for the $20,000. No moneys are exchanged.
  3. At the closing, Jim assumes the existing first mortgage and then signs a promissory note of $20,000 to his aunt. Jim then uses what little cash he had to pay the required closing costs. Jim's new home will have $90,000 in liens.
  4. A year later Jim takes out a $20,000 home equity loan to refinance the second mortgage. This refinance loan pays off his $20,000 loan with Aunt Martha, and Jim has bought a home with no down payment.

Another option would be to refinance with a consolidation loan that pays off both the assumed loan and the $20,000 promissory note. Jim could also use this refinance opportunity to pull out additional cash from the property.

Note that this approach can be used even if the seller and buyer are not related—the buyer must merely find a cooperative seller. For more information about using seller-held second mortgages, see the "Seller Financing Options" article.

If you are considering use of assumption loans to acquire investment property, please take the time to review the "Creative Real Estate Investing Guide" in the "Real Estate Investing" section.

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Real Estate Planning And Prosperity

Real Estate Planning And Prosperity

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