Two Methods of Seller Financing (AITD, Subject to)

Seller financing comes in many shapes and sizes, including the AITD.  AITD is the acronym for "All Inclusive Trust Deed."  Click here for a brief document from Lawyer's Title that explains what it is.


Following is a slightly expanded explanation from your blogger, but I’m not a lawyer, so this is not legal advice. You should consult an experienced real estate attorney if you contemplate offering or accepting this sort of financing. I'll refer to "you" as the buyer and "him" as the seller.  Of course the seller could be a her, and so could you!

AITD's

With an AITD, you the buyer get title to the property without putting new financing on it. Instead the seller passes through the benefit and responsibilities of the current financing to you, but remains obligated on the original mortgage loan(s). So you have an official continuing responsibility to him (evidenced by the AITD), and he continues to have a responsibility to the existing mortgage lender. You make your payments to him, and as long as you do so and keep the terms of the AITD, or eliminate the AITD entirely by refinancing the property yourself, the property remains yours.

If you fail to keep the term of the AITD, the seller can take back the property under the deed of trust you have given him (like a traditional lender can take back a property if you don’t keep the provisions of the loan). This keeps the seller at risk on the property, which sellers don’t like, because it could affect their credit. If the buyer doesn’t make the payments, the bank will probably go after the seller for the money and the buyer for the property. But it does enable you to close on a property before you can get new financing on it. What sellers do like about it is that an AITD makes it clearer what happens if the buyer doesn’t keep his part of the bargain.

Subject to

Another approach to seller financing is to purchase a property “subject to” the existing mortgage. That means you get title to the property without putting new financing on it (just like above), but in this case you’re officially assuming responsibility for the existing mortgage loans on the property, and ostensibly letting the seller off the hook, without getting the lender’s approval to do so. So purchasing the property “subject to” the existing mortgage basically means that you are taking over responsibility for the mortgage yourself and assuming the seller’s responsibilities to the lender. The buyer will make monthly payments directly to the lender in this instance.

Subject to financing is easier and faster to do because it’s a less formal approach than an AITD, and the buyer doesn’t have to pay to have an AITD drawn up. But it doesn’t really define what happens if something goes wrong (such as you not maintaining the property or making the payments). And if the bank calls the loan, somebody must get the property refinanced right away. The bank will probably go after both buyer and seller to get their money and the buyer for the property.

Problems?

So assuming the buyer continues to make payments and maintain the property, what could go wrong? The problem is that most mortgages (including the ones on these properties) have a “due on sale” clause, which means the mortgage must be paid off when the property is sold, and some have an assumption clause, which means a buyer can assume the existing mortgage so long as he gets the lender’s permission first (if he doesn’t, then the due on sale clause applies).

Banks like to approve loans before making them, and they want to be asked before someone assumes them or takes them over. One obvious reason is to ensure the new borrower is as creditworthy as the old. Another is that it’s a new chance to appraise the property. Another is that if rates have gone up, they want to get out of the old loan terms.

Current Environment

So what does the market tell us about a lender's receptivity to these sorts of financing? Well, we all know that credit has tightened, so basically nobody is as qualified as before. Values have gone down, so banks want to re-appraise properties and get their loan-to-value ratios back down. And rates have gone down, so there’s not much motivation to drive deals to current rates.

Would a lender really wish to call a loan were they to discover that a buyer had taken them over? Probably, but they have their hands full these days, so it might take awhile. On the other hand, if your plan is merely to buy more time to assume or put permanent financing on a property, either an AITD or “subject to” scenario should be short lived.  And if all goes well it shouldn’t make a big of difference which approach you use.

Recommendations

In this writer's opinion, the reason it matters which you choose is that if something does go wrong (you don’t make your payments or the seller doesn’t make his payments under an AITD or you are ultimately unable to assume or refinance the original mortgage loan), then you and the seller are going to have a longer relationship than anticipated.

And if I was going to have a potentially long financial relationship with someone, I’d want it documented as thoroughly as possible.  In this case by an experienced real estate attorney, perhaps for around $1500, because this is not something to try to do with a boilerplate form.

Not only would I get to do my transaction, but I could sleep at night too! - David