A seller-held mortgage can be used when buying any type of real estate.
The term "owner carry" refers to a form of home financing in which the seller carries the mortgage for the buyer instead of accepting cash in a sale transaction. When mortgage guidelines tighten, borrowers find it more difficult to get approved through conventional lending channels. And when the sales market is slow, sellers look for ways to give their property more appeal to buyers. An offer to carry a first or even a second mortgage may be just the tool that allows a homeowner to sell.
Buyer Benefits
The buyer is able to negotiate the terms of the seller-financed loan, making the entire transaction more flexible. Down payment, interest rate and number of years can be spelled out in the offer. In addition, the cost to close a seller-financed loan will be much less than a bank-generated loan because it will not have origination, processing or underwriting fees.
Seller Benefits
The seller will have a faster closing since there are no lender requirements to slow down the process. He also may be able to get a higher sales price for the home, which has added benefits for the neighborhood market. The loan agreement also allows the seller to receive monthly payments rather than a lump sum of funds, which can create tax liability unless he is ready to reinvest it.
Seller-Held Second Mortgage
When the buyer is able to obtain a conventional loan for her first mortgage, she may be able to negotiate a seller-held second mortgage for the balance of the selling price. A second mortgage is a loan that is filed after the first mortgage. It is usually a smaller amount and can be used instead of a down payment. As an example, say the buyer was approved for an 80 percent first mortgage, meaning the amount of the funding will cover 80 percent of the home's sale price. Conventional lending requires that the buyer make a 5 percent down payment, but the buyer and seller can also negotiate and agree upon a seller-held second mortgage for the remaining 15 percent. The closing agent or attorney who closes the loan for the first mortgage can draw up a promissory note for the new seller-held second mortgage.
