In some cases, a seller may agree to make a loan to a home buyer to help them purchase the home. Sellers who agree to a seller-assisted mortgage, or a seller carry-back, finance all or part of the purchase price and receive documentation of the terms and conditions of the loan.
In most cases seller carry-backs are recorded in the public records and take the form of a lease purchase, land contract, trust deed or mortgage, most of which are secured with a promissory note.
Why Sellers Carry-Back Loans
Buyers who do not meet lending requirements from a bank or credit union, or during times of high-interest rates, may ask a seller to act as the bank and carry financing. If the home is owned free and clear, the seller may carry 100% of the financing or the buyer may obtain a conventional loan for part of the purchase and request the seller finance the rest.
If there is an existing mortgage on the property, the seller may allow the buyer to take over the payments, even though the loan remains in the seller's name.
There are several reasons sellers may agree to a seller-assisted mortgage:
- The real estate market is down, and a seller carry-back may increase the number of prospective buyers.
- The buyer does not qualify for a conventional loan.
- The seller is facing capital gains on the sale of the home and wants to defer the portion that is financed.
- The financing arrangement gives the seller an improved rate of return opposed to other investment strategies.
- The seller wants regular monthly income.
- The property is non-conforming, and a lender will not make a loan on it.
- The seller may receive a higher sales price in exchange for a seller carry-back.
There are disadvantages to this for the seller, however. The buyer may default on payments, for example, which forces the seller to initiate the foreclosure process. After foreclosure, the seller may not have any equity remaining in the home after making up payments to a lender (in the case of an existing loan) or paying commissions and closing costs. The seller will also have money tied up that is secured to the home.
A Seller Carry-Back May Be Converted Into Cash
There are many private investors who purchase seller carry-back instruments, usually for less than face value. Sellers may lose 10-30% of the unpaid balance, depending on many factors, such as seasoning (or how long the seller has been receiving payments), the interest rate, the mortgage term, prepayment penalties and late charges that are attractive to the investor, and the loan-to-value ratio.
Benefits of a Seller-Assisted Mortgage for Buyers
Homebuyer can also expect several benefits to a seller-assisted mortgage.
- Fewer qualifications. The seller may request a credit report, but they are likely to have less strict requirements than a traditional lender.
- Personalized financing options. Buyers can choose from several payment options.
- Negotiable down payment. Some sellers will want a large down payment while some will let the buyer make the down payment in several lump-sum payments.
- Reduced closing costs. Buyers will not pay discount points, processing fees or origination fees.
- Fast closing. There is no need to wait for the approval of a lender, and closing and possession of the home may be very quick.