Expert: Dick Dennis - 8/12/2010

Question
QUESTION: My mother bought a house 6 years ago with an FHA loan. She is now trying to sell to my sister. The bank is telling them they cannot not add the closing costs of 5400 to the buyer contract as it would exceed the the amount of the sell price of 109000 (appraisal). why is this so and why are they making it so difficult? there is no way my mother or sister can come up with this kind of money out of pocket. any suggestions, what other options does she have? She is selling because she can no longer afford the payments, and cannot afford to fix up the house. (they live in Minnesota)thank you for you help.

ANSWER: My guess is that your mother is selling to your sister and your SISTER IS NOT GOING TO LIVE IN the house. Banks are wise to that ploy, Jessica. What is happening is that a better loan situation is erased when they suspect the buyer is not living in the property. So, they are adding costs to compensate themselves, all the better if it makes it difficult for your sister cannot come up with closing costs.

However, Jessica, there are other ways of solving your mother's situation. The first two that come to mind is for your sister to buy the house "subject-to," and "land contract." Both are legally risky but in this economy no bank is going to attempt to foreclose as long as the payments continue to be made. Transfer costs should be minimal in either of the two ways.

My recommendation is to consult with a good Minnesota REAL ESTATE attorney to make sure your mother's and sister's interests are protected. The attorney will explain further what to expect and most likely will put the transaction together for you.

Please excuse my response time. This is not usual. I am recovering from a heart attack.

I do wish you well.

Dick Dennis
dixiedee13@aol.com

---------- FOLLOW-UP ----------

QUESTION: Actually my sister IS GOING TO LIVE IN THE house, but I can see why the bank thinks she is not. Could you please elaborate on the "subject-to" and "land contract" i'm not sure what that is? Thank you so much for the information and Im so sorry to here of your health, I hope that you are feeling better. Jessica

Answer
When you buy a house "subject-to," you are buying it subject to the existing loan obligation(s). You're not assuming the loan(s), you're just letting the seller know that you know the loan(s) are there and it is your intent to continue to make the payments on the loans.

The original intent of buying a house "subject-to" was to escape the existing lender requiring the buyer to get a new loan because almost all mortgages and their notes stipulate that the seller cannot alienate the title. If the title is alienated, then lender has the right to file foreclosure proceedings. Therefore, that is the legal problem your sister and mom may encounter in this kind of transaction I referred to.

But in all practicality in today's economy that isn't going to happen because the banks already got a whole backup problem with loans that actually have not paid their obligations. As long as the payments are being made on your mom's house, I seriously doubt THAT lender is going to file a foreclosure. There's lots more to be added to this, but I don't have too much more time for this matter. Please bear with me in light of the fact I came home from the hospital two days ago.

If you will send me a regular email, I will respond with a more extensive explanation of subject-to and land contract. But in both cases, be aware that a savvy Minnesota real estate attorney should be part of your sister/mom transaction. The accent is on SAVVY.

A land contract is a little different but has the same affect of evading the lender's attention. It also has many ideocynracies to it, for example, it keeps the seller's name on title while the buyer is in possession. And a few other concerns.

Email me and I will explain the best I can these two options.

Dick Dennis
dixiedee13@aol.com