Seller Carry Backs: What Are They?
When it’s difficult for borrowers to get financed for a home, some sellers are willing to work with them to help finance the buyer’s purchase using “seller carry backs.” (This is a general term for when the seller of a home—or real estate in general—provides financing to the buyer.)
You may be asking yourself, why would a seller carry back a mortgage? When interests rates are high, credit markets are tight, and homes sales are down, sellers have strong motivation to work with buyers in order to get their home sold. Other reasons a seller might carry back a loan include:
• The seller might face capital gains on the sale of the property and can defer the portion that is being financed
• The home might be non-conforming and so a lender will not finance it
• The seller might want a regular monthly income
• A seller could possibly get a higher sell-price if they offer owner financing
According to several Bay Area REALTORS® we’ve spoken to, there has been a resurgence of seller carry backs in the last year—something this area hasn’t seen for a decade.
Carry backs are often referred to as a “seller carry back mortgage” or “seller carry back deed of trust,” and the loan is secured with a promissory note (in which all the terms and conditions of the loan are outlined) and recorded in the public record.
Here are a just few examples of how seller carry backs can work:
The seller’s home is free and clear of any loans but the buyer can’t qualify for a home mortgage large enough to cover the full selling price. The buyer might finance part of the home with a traditional fixed-rate loan. The seller would then finance the rest of the home’s selling price as a loan.
If the seller has an existing mortgage loan on the home, they may have the buyer take over the payments, with the loan remaining in the seller’s name. The difference between the selling price, what the buyer puts down as a down payment, and the remaining balance on the seller’s original loan is the equity that the seller would carry-back as a loan.
Buyer can’t qualify for a loan because they don’t have enough for the down payment. Today, it’s not uncommon for lenders to require a 20 percent down payment in order to qualify for a loan. With the median price of a Bay Area home hovering around $517,000 (as of May), that could equate to as much as $103,000. If a buyer doesn’t have this much cash on hand, the seller may be willing to finance part of the down payment with a loan.
There are risks associated with seller carry backs:
• Sellers have cash tied up in the property.
• The buyer could default on payments, and the seller would have to foreclose.
• If the seller does have to foreclose, they may have to make up back payments to the original lender (if there was an existing loan when the home was sold). After that, along with paying closing costs and REALTOR® commissions, they may no longer have any equity in the home.
• For the buyer, there is a risk that the seller could default on their mortgage payments (if the property was not free and clear of a loan at purchase time), and the buyer could lose their investment.
In general, seller carry back financing is arranged for a period of 5–7 years. This gives the buyer enough time to strengthen their credit and qualify for traditional financing for the full mortgage loan. Or, the financing can be arranged for a shorter period—as the buyer and seller may be trying to just wait until the credit markets improve.
If done correctly, seller carry backs can be beneficial to both buyer and seller, especially when the housing market is tough, but both parties need to proceed with extreme caution. There are some rules and restrictions to seller carry backs. Anyone considering seller carry backs should enlist the help of a qualified attorney. This will help to ensure sure both the buyer and seller are protected.
