Here's some good news for anyone trying to sell or buy a home in today's 14 and 15 percent mortgage market: Three new "creative financing" opportunities have just been made available that could be exactly what you've needed.
The first comes from Fannie Mae, the behemoth Federal National Mortgage Association, which owns $56 billion worth of America's mortgages.
Fannie has decided to lend a helping hand to seller-financers -- the tens of thousands of homeowners every year who provide the first deed of trust or mortgage financing for the purchasers of their real estate.
"Taking back" a purchaser's financing -- in effect, deferring full payment of the purchase price -- has been one of the most traditional methods of selling a house in tough markets. Rather than forcing a buyer to go out and find a conventional loan from a bank at intolerably high rates, sellers offer attractive, below-market rates -- 12 percent, say, in a 15 percent market.
The problem with such financing, though, is that it tends to leave the seller with an investment that's hard to turn into cash in a pinch. When you take back a $75,000 first deed of trust on a $90,000 house at 12 percent, you're generally stuck with it for the duration -- unless you want to sell the note to a local investor at a discount so steep that you hand over half your money.
This often produces a related drawback for the home buyer in a seller-financed transaction: The terms on the mortgage tend to be far shorter than on loans obtainable in the open market. That $75,000 mortgage at 12 percent probably carries a three- to five-year "balloon" payment requirement, forcing the buyers to refinance the loan much sooner than they'd like.
Sellers insist on these short terms because they don't want to be professional bankers for the next 20 years. Understandably, they want their money.
Enter Fannie Mae. This congressionally chartered mortgage corporation will now "cash out" seller-financers who agree to conform to nationally prescribed standards.
Fannie will buy first deeds of trust or mortgages between individuals in a home-sale transaction that:
Originates with the professional help of mortgage bankers, savings and loan associations or commercial banks that normally deal with Fannie Mae. a
Complies with sound lending principles regarding appraisal of the property's market value, and the creditworthiness of the home purchasers.
Carries regular 20- to 30-year monthly payment terms, with no balloon provisions.
Rather than calling up your real estate attorney to draft the mortgage or deed of trust when you sell your house and finance your buyer, now you should think about calling your local mortgage banker or S&L.
The lending institution will do everything it would in a normal loan transaction except provide money from its vault. It will use the standard documents required by Fannie Mae and handle all the paperwork. The lender will also "service" the loan every month for you -- that is, collect the principal and interest from your buyer and keep track of tax and insurance escrows -- in exchange for a negotiated fee.
(Fannie Mae pays lenders 3/8 of one percent of the loan's principal balance for loans serviced on the corporation's behalf. Your servicing fee to the local lender should be about the same and certainly no higher than 1/2 percent.)
When and if you want to turn the loan into cash by selling to Fannie Mae, you call up the mortgage banker or S&L servicing note. It will get a commitment from Fannie to buy the loan at a certain "price." How favorable that price is to you depends on how shrewd you've been in choosing your time to sell.
Let's say you make that $75,000 mortgage loan at 12 percent right now in the midst of a 15 percent market. To a sophisticated investor like Fannie Mae, your 12 percent loan is only worth 85 cents on the dollar; that is, its below-market interest rate cuts its cash value by 15 cents for every dollar of principal.
So now wouldn't be the ideal time to sell to Fannie Mae (or to any other investor). Down the road, though, interest rates are likely to drop closer to the 12 percent rate on your loan. When they do, then you should consider turning the note into cash. Fannie Mae will buy the loan at close to 100 percent of face value.
The people who bought your home will continue paying the local lender servicing the long-term mortgage. They'll have no life-disrupting balloon payments to concern them. You'll have all your profits from your home sale. And Fannie Mae will own the custom-crafted loan that made your house sale go in the first place.