Note: This article addresses seller carry back second mortgages, taken concurrently with traditional loans. Some professionals refer to any seller financed loan as a seller carry back mortgage. More information about other types of seller financing can be found here: Seller Financing Basics.
What is a Seller Carry Back Mortgage?
A seller carry back mortgage allows a buyer to take out a small loan from the seller in addition to his primary loan from a bank. In this way, buyers are able to avoid pricy PMI (mortgage insurance) payments to the traditional lender and compensate for having a down payment less than 20%.
For example: A buyer wants to purchase a house for $100,000 but only has a 10% down payment ($10,000). Instead of applying for a $90,000 mortgage from the bank, the buyer takes out a small second mortgage from the seller. The buyer puts $10,000 down, takes out an $80,000 mortgage from the bank, and promises to pay the seller an additional $10,000.
How Does a Seller Carry Back Mortgage Work?
Once the buyer and seller agree on terms, the buyer secures a traditional mortgage for the necessary amount. At closing, the title is transferred from the seller to the buyer. In return, the seller is given a promissory note for the amount owed. The buyer makes monthly payments to the seller until the loan is paid off. Often, a third party note servicer (such as NoteWorld) takes care of collecting these payments and interceding should the buyer begin to default.
The terms and interest rate of the seller carry back mortgage can vary, depending on the specific agreement. However, it is common for these loans to be shorter than a traditional mortgage. Generally, seller carry back loans are paid back between two and seven years.
Where Can I Find a Seller Carry Back Mortgage?
A buyer is more likely to find a seller carry back mortgage if he needs a loan that is less than the difference between what the seller owes on his own mortgage and the amount of the buyer’s traditional loan. If the seller is asked to retain his original loan to make the deal, he will have to deal with legal issues such as the “due-on-sale” clause. Don’t be afraid to ask any seller or real estate agent if financing is available for a property. Especially in a buyer’s market, sellers are often willing to consider carry back deals.
Seller Carry Back Mortgage Alternatives
A seller carry back mortgage isn’t the best fit for all buyers. If you need a larger loan or won’t qualify with a traditional bank, consider other seller financing alternatives such as assumable mortgages and private party loans.