| Real Estate 101 - Alternate Financing |
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| What is a Bridge Loan/Swing Loan/Interim Financing? | |
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A bridge loan/swing loan/interim financing is a type of a short-term second mortgage, that allows the owner to use the proceeds to close sale on the next home before closing sale on the existing home. When the existing home closes the sale, this loan is paid off. | |
| What does it take to qualify for a Bridge Loan/Swing Loan/Interim Financing? | |
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Due to the risk involved on the lender's part, these loans tend to have a high interest rate. Lender looks for income enough to cover all mortgages, existing mortgage(s) and bridge loan on the existing home, as well as the new mortgage on the next home. | |
| What is an Assumable Loan? | |
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Assumable loan is a loan obtained by the current property owner, that can be taken over, with lender's approval, by the new buyer of the property. | |
| When should a homebuyer consider assuming a loan? | |
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Assuming an existing loan on a property makes most sense when the interest rate on the existing loan is lower than the same for a new loan in the market. | |
| What happens when a buyer assumes seller's existing loan? | |
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If the new buyer qualifies and the lender approves the assumption, the buyer takes over the monthly payment. The buyer may be asked to pay for new appraisal, loan assumption fees and other closing costs. | |
| Does the seller remain liable for an assumed loan? | |
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Yes! The seller remains liable for an assumed loan until it is completely paid off by the buyer who assumed it. In case of a foreclosure on an assumed loan, lender can come after the seller for any shortfall toward recovering the loan balance. | |
| What is an Assumption Clause? | |
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Assumption clause is the clause in the loan contract that details the provision for the loan to be assumed by a new buyer of the property. | |
| What is Buydown? | |
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Buydown is a type of financing where additional discount points are paid to the lender in order to reduce the interest rate on a loan. | |
| What are the types of Buydown financing? | |
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First type is a temporary buydown, where some of the interest is pre-paid in order to reduce the interest rate over first few years. Second type is a permanent buydown, where the additional discount points paid up front enable a low interest rate over the entire life of the loan. | |
| What is the advantage of a Buydown? | |
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Since buydown reduces the interest rate, it is easier to qualify for the loan. Also, since the discount points are considered to be non-recurring closing costs and the lender usually allows seller/builder to pay all or part of buyer's non-recurring closing costs, the buyer may be able to negotiate on having those paid by the seller or builder. | |
| What are Discount Points? | |
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Discount points are additional closing costs paid to a lender in order to reduce the interest rate on a loan. One discount point is 1% of the loan amount. | |
| What is a Seller Carry Back or seller financing? | |
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A seller carry back, also known as seller financing, is an agreement between a buyer and a seller, where the seller agrees to provide financing to buyer by carrying back a promissory note from the buyer for a part or the whole of the purchase price on seller's property. | |
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