It often happens that a bank or mortgage company will not finance the full purchase price of a home loan. The buyer may have enough to cover part of the needed funds with his down payment, but there may still be a substantial deficit to overcome. One solution for both buyers and sellers is to use the ‚Äúseller carry back‚Äù option for financing the balance of the price.
What Is Seller Carry Back?
Seller carry back means that the seller finances a part of the purchase price of the home being sold. A deal is arranged between the buyer and the seller and drawn up into a contract and a promissory note. The buyer is expected to pay back the seller carry back note in regular payments or in a lump sum at an agreed time. The seller is basically a second mortgage holder.
Benefits for the Buyer
The most important benefit of the seller carry back loan for most buyers is that it makes it possible for them to buy a home they want. In most cases, this type of loan will not be done if the buyer was able to arrange standard mortgage financing for the entire amount of the home. Therefore, the seller carry back loan may be the last chance for the buyer to get the home they so want to purchase.
Using the seller as a second mortgage holder also makes the process of purchasing the home quicker and easier. Of course, the first mortgage company has to be satisfied and has to agree to the fact that the seller carry back will take place. Yet, the details can be arranged between the buyer and the seller very swiftly, often in a couple of weeks.
Many restrictions related to borrowing money may be relaxed if the seller so chooses. This might make it easier for a buyer to purchase a home with less than perfect credit or a smaller down payment. There will also be fewer loan costs and closing costs related to the seller carry back portion of the sale.
Benefits for the Seller
The seller may benefit from using seller carry back in several ways. For one, she might have a larger pool of buyers competing to make a deal on the property. The competition can drive the price up, which increases her profit from the sale.
Then too, the seller will get interest income from the money that she loaned the buyer for the sale. The interest on a seller carry back loan is generous because of the higher risk the seller is taking. As a second mortgage holder, the seller might have trouble recouping her asset if the buyer defaulted, since the first mortgage holder always gets first dibs on the foreclosed property.
However, if the seller is careful about the buyers she accepts for seller carry back loans, she can cut her risk tremendously. Many people who are very creditworthy do not qualify for the full first mortgage loans they want for a variety of reasons. It is up to the seller to determine who those people are and more importantly, who they are not.
Seller carry back financing is a good deal under the right circumstances. It can help both sellers and buyers get what they want. If you are considering doing this kind of deal, it is a good idea to talk to someone who has experience with them so you can have a better understanding of the process.