In a world of sensitive economic recovery, Realtors are often asked how Seller Carrybacks work. Is it a viable solution to help buy a home? While home funding loan complexities tend to surface unexpectedly during many real estate transactions, its important to understand all options as determining if a Seller Carryback is a good fit for your economic outlook as this is and can be a complex situation. As we highlight and touch on the vast details related to Seller Carrybacks, this article is intended for informational purposes and we encourage you to discuss all your investment finance options with your trusted Mortgage Professional, Real Estate/Tax Attorney, CPA and or your designated Realtor to make the most information decisions possible. Below is a typical breakdown of a Seller Carryback identifying what kind of circumstances would a home Buyer or Seller entertain this type of resource, what all is involved and when would a home Buyer or Seller possibly entertain entering into a Seller Carryback program.
How Does it Work?
Sellers may entice home buyers who are seeking out unconventional ways to obtain finance due to an array of unique economic situations. By offering a Seller Carryback finance option or sometimes referred to as Money Mortgages, the Seller typically makes special finance eligibility concessions. Seller Carrybacks occur when the Seller of a property is enticing and attracting a broader range of home buyers by assuming the position of the Buyers lending source. The Seller carry’s a second mortgage on the subject property on behalf of the new home Buyer ranging from adjustable rate to a fixed loan product similar to a bank. The qualified Buyer has committed to paying down the Seller’s second mortgage each month. A Buyer considers entering into a Seller Carryback after most/all finance options have been explored and exhausted.
We all know the very initial step in buying a home is to begin pre-qualifying with your trusted loan resources. Some home Buyer’s may opt to go through their bank or credit union, while some home Buyer’s are empowered by a trusted lender mortgage broker to expand more lending products and options with competitive interest rates and fees. Once a prospective home buyer explores the various loan products. Your Realtor then caters the type of real estate homes and inventory best suited for your future residential lifestyle needs. This pre-qualification step helps determine what type of home you will want to pursue and view once you and your lending professional can determine (within your comfort zone) how much you can afford to spend on your future new home/town-home/condominium. You and your lending professional assess affordability determined by income, credit rating, monthly expenses, how much available for down payment and eligible interest rates.
For examples, let’s just review the standard and typical loan products most home buyer’s initially begin analyzing…
For example, if a home buyer has minimal cash available to put down on a home…the loan officer and home buyer may opt for funding via Federal Housing Administration (FHA) loan. This is a common finance program with 3.5% of the total purchase price of the home required down at close of escrow. Yes, this is the least amount of cash down required to close escrow on your future new home. FHA loan programs offer lower down payments and are a good option for first-time home buyers. Since this type of loan program requires the least amount of down at only 3.5%, Premium Mortgage Insurance (PMI) is required for borrowers with less than 20% of their own money down towards the loan. (inventory of homes may vary and not all homes/town-homes/condominiums may qualify for FHA eligibility)
Another example, if a home buyer has additional funds to put down towards a home, they may opt to purchase their next home via Conventional Finance. Conventional Finance has a typically amount down of minimally 5% to 20% of the total purchase price depending on each home buyer’s unique economic profile of debt to income ratios.
Another example, if a home buyer wants to purchase by VA Loan, not all communities or homes qualify for VA Loan home purchases. (inventory of homes may vary and not all homes/town-homes/condominiums may qualify for VA Loan eligibility)
After reviewing and deciding on the best suited lending program for you, your Realtor will then need to search for specific homes meeting the ideal mortgage program fitting your mortgage payment comfort zone.
A home buyer falls in love with a home that does not meet any of the above loan products or qualifications required. This is when a Seller Carryback comes into play. A Seller Caryback typically occurs when a Buyer searches out for a Seller Carryback type real estate listing as the very last resource after all other finance means have been exhausted. For example, many condominium/ town home communities may not quality for FHA, VA loans due to unwarrantable eligibility hindering a buyers loan approval. Loan denial may also stem from Condo Certification results required by underwriters in order to complete the borrowers approval requirements for full loan approval. The condo cert verifies many answers requested by the lending institutions questionnaire, such as rental income property ratios versus primary residential occupancy. If the rental ratio exceeds 52% the loan is considered un-warrantable, therefore the Home Buyer’s loan is then denied. Another possibility, an appraisal discrepancy when it comes to remodeled and updated historic homes surrounded by original homes with outdated properties recently sold that an appraiser is not familiar with. Failure to provide substantial comprehensive viable recent closings and over come the value objectives with similar homes comparable to the subject property could result in a home buyer’s loan denial. The Buyer is forced to forgo the property with no further options but to move on to another home.
The Seller Carrybacks common concept is used only when a home Buyer has exhausted all finance options and no other lending institutions are offering comparable finance terms. Yet on the contrary, it’s sometimes in the best interest equally for a Seller to entertain offering a Seller Carryback to help sell their home to a qualified Buyer when their community observes strict lending eligibility qualifications.
What is Involved?
Seller Carrybacks may or may not always include Seller closing costs concessions as this depends on each purchase contract negotiation. However, Seller Carrybacks typically carry higher than traditional market-based interest rates since it is considered to be a financial risk to the second mortgage carrier, therefore interest rates typically range from 8% to 15%.
According tot he National Association of Realtors, on average 1 out of every 10 Realtors report escrow cancellations as a result from low appraisals. Hopefully your Realtor has proactively supplied you as the buyer comparable homes similar to the subject property closing escrow within the last 60 to 90 days. If this very same data and information does not overcome the appraisers analysis, a Seller Carryback may also occur in the event both Seller and Buyer agree on the subject property value and monetary worth. Circumstances such as this occur in Historic Residential Communities as various homes may have been remodeled, replaced copper plumbing etc.
In the event a Seller Carryback ensues the next step is for you as the buyer to authorize release of the original loan approval and credit report for the Seller to make an informed decision to enter into a Seller Carryback program. The Seller may review the pertinent data and information and after careful consideration they conclude the Buyer will make the mortgage payment without fail. The Real Estate attorney prepares the formal document that details the interest rate, loan amount, and terms. The paperwork terms are notarized and handled by the title/escrow company.
As we have stressed throughout, Seller Carrybacks should be used as a Home Buyer’s very last resort. The typical Seller Carryback mortgage programs we are seeing in the Phoenix market today range from 8% to 12% interest, 10% to 20% of the total purchase price down, with a 30 year due in 2 years. Seller’s offering Carryback financing are subject to the very high financial risk by entering into this type of agreement as they are the last party paid in the event of foreclosure. The first mortgage gets paid off first and in the event no funds remain, the Seller could end up with a astronomical investment loss.
In conclusion, our professional stance is preferable for our clients to pre-qualify traditionally with their trusted loan officer or bank to take advantage of the various programs and interest rates available today with 3.5% to 20% down minimally, yet accessing your individual unique economic profile is something worth reviewing if the Seller Carryback is a win, win.
Would love to hear your thoughts on Seller Carrybacks.