Hero Loans…Once Again, SELLER BEWARE
Westcoe Realtors, Riverside Ca…OK…we thought we were done with the many calamities that can befall a seller when they are selling a home with a Hero loan in place, but here we go again.
To briefly refresh, Hero loans (or Pace loans…they are known by either name) are loans obtained by the seller for energy related home improvements, and then the loan balance is attached to the property tax bill to be paid off over time. However, in the event of a foreclosure, the Hero loan is now a part of the property taxes and therefore gets paid off before the 1st trust deed, and this does not sit well with new lenders. As a result, lenders refused to make a new loan on a property with an existing Hero loan unless said Hero loan was paid off at the time of closing.
In essence, no matter what the salesperson told the seller at the time the Hero loan was obtained, a buyer cannot assume the seller’s existing Hero loan unless the buyer is paying all cash for the home. Otherwise, any new loan needed by the buyer will require the existing Hero loan to be paid in full.
However, recently FHA has said that they (as opposed to FNMA and FREDDIE MAC, the two largest loan purchasers) WILL allow a Hero loan to remain in place when a new loan is issued. This would allow some sellers to better sell their home if the buyer, for whatever reason, was willing to assume the existing Hero loan payments.
BUT (and we can’t say this LOUD enough), as is usually the case with existing Hero loans, there is still a large problem with the buyer assuming the existing Hero loan. In this case, while FHA has said that they are OK with the existing Hero staying in place, title companies, who insure the title to the home, are not allowing this new FHA loan to stay in place unless THE EXISTING HERO LENDER FORMALLY AGREES TO THE NEW 1ST LOAN BEING PAID AHEAD OF THE HERO LOAN IN THE ADVENT OF A FORECLOSURE. This is called a “subordination agreement”, and it’s no surprise that most Hero lenders will not sign one. Therefore, no subordination agreement, no sale, no matter what FHA says.
The bottom line here is that, as we have stated before in this blog space, Hero loans are nothing but trouble for sellers. Most sellers are sold a “bill of goods” by the original salesperson about the buyer “just assuming the loan” when in reality, the sales person is not a Realtor, and knows nothing about the financing world that the owner will have to live in when it comes time to sell.
So…our advice, as we have stated before, don’t finance your home energy improvements with a Hero loan, and if you do, you really need to understand the ramifications you will face if you want to sell your home before the Hero loan is paid off. We really hate to see these sort of problems crop up for a seller when they least expect it.
Good luck…hope this helps.