Seller Financing

Carrying a First Mortgage

Sellers whose loans are paid off or who have very little loan remaining are in the position to be the mortgagors for the buyers of their houses – if the sellers are in the financial position to do this. Sellers who do this for buyers should be just as hard nosed about the buyers’ qualifications as a lender would be and/or make greater demands, such as higher interest rates, if the buyers are marginal.

Carrying a Second Mortgage
In the case of "carrying back a second mortgage", sellers loan to buyers part of their equity. In this scenario, buyers finance the bigger part of the mortgages with traditional lenders and they finance the remaining, smaller amounts with the sellers. Typically buyers would pay a slightly higher interest rate on loans financed by sellers as a second mortgage.

The following are some thoughts for sellers to consider in carrying financing for their buyers

The Purchase Price
Sellers probably should stick to their asking prices if they carry back financing for buyers. This is such a big favor to give to buyers that it is unreasonable to give them another big favor of a lower price. Buyers would be real nervy to ask for both. (Always allowing for special circumstances.)

The Down Payment
Like a lender, sellers should see the buyers’ down payment as a commitment to pay their debts, and as motivation to protect the properties. Therefore, the larger the down payment, the better for sellers.

The Interest Rate
Sellers are justified in offering an interest rate comparable to the rate asked by lenders at the time of contract.

The Buyer's Credit & Income
Like a lender, sellers would do well to obtain a credit report on the buyers for whom they will hold financing in order to feel assured that their buyers are people who pay their debts. Additionally, sellers need to know the buyers’ incomes and sources of income to determine if the buyers’ salaries are sufficient to make mortgage payments.

Amortization
Most mortgages are amortized on a 30-year schedule even if they have balloon payments. This computation makes the payments in line with payments in general.

Balloon Payment
A common practice for seller financing is to have the full amount of the loan due on a certain date shorter than the 30-year amortization period. Usually the balloon payment is due in 5-15 years. This gives sellers a profitable short-term investment with the provision that the principal investments will be recouped in any of those time periods.

Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as escrow payments due with the mortgage payments. Then the lenders pay annual tax and insurance payments when due. While this adds time and hassle to the seller-financer, it also protects sellers from the unfortunate situation of having the houses they are financing burn down with no insurance to replace them, or the houses being claimed by the government for lack of real estate tax payments.

Lender's Title Insurance
It is wise to require the buyer to obtain title insurance on the property.