Let’s face it, selling your home can be pretty difficult, and even if you do find a buyer, who knows if they can obtain financing. In a buyers market sellers often entice buyers with special concessions such as seller paid closing costs and seller carryback financing.
The Seller Acts as the Bank for the Buyer
Seller carryback financing is basically when a seller acts as the bank or lender and carries a second mortgage on the subject property, which the buyer pays down each month. Not only is it offered as a means to getting the home sold, but often it’s necessary to get the deal done if conventional banks and lenders won’t offer the total amount of financing needed.
By offering seller carryback financing more buyers will be able to qualify to buy your home. It also makes your home more attractive to buyers, and can boost the sales price of your home as well. In addition to that, you’ll be earning interest each month as opposed to a straight cash sale.
The idea behind it is that if you believe in the value of your home and feel the buyer will make the mortgage payments without fail, it can be a good investment and a means to facilitate the sale of your home. In tough times, it may make of break the sale of your home as sellers shop around for the best terms, especially when conventional lenders offer less than 100% financing.
Interest Rates on Seller Carryback Financing
The mortgage rate on a seller carryback is determined by the buyer and seller, and takes into account the amount of down payment and the credit profile of the buyer. Obviously a buyer with poor credit will be subject to a much higher credit score than a borrower with a solid credit history.
The interest rate is usually in the range of 8-15% on a seller carryback, and the terms can vary just like a typical lender-based loan, ranging from an adjustable-rate to a fixed mortgage product. It is almost always going to be higher than a market-based interest rate because it is assumed that a seller carryback is only being offered because no other bank or lender will offer the same financing terms.
The structure of a seller carryback can vary based on what is negotiated between buyer and seller. Typically, a buyer will get an 80% first mortgage with a large bank or mortgage lender, put 10% down and carryback the remaining 10% with the seller. Sometimes the seller carryback will only be 5% or potentially up to 20% of the asking price.
If you are a seller thinking about offering carryback financing, do note that in the event of a foreclosure, you are the last party to be paid. The first mortgage always gets paid off first, and if little or no money remains after that, you may end up with a big loss.
Ask the buyer to give you permission to show you their loan approval and their credit report so you can make an informed decision before you put it in writing. And always create a formal document that details the interest rate, loan amount, terms, and have the paperwork notarized and handled by an escrow or title company.
Note: Seller carryback financing may also be referred to as a purchase money mortgage.