A: Also known as a purchase money mortgage or carry-back, it is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller’s favor.
The seller may take back a second note or finance the entire purchase if he owns the home free and clear.
The buyer usually makes a sizeable down payment and agrees to pay the seller directly every month.
The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.
If the buyer defaults on payment (as will be determined by loan agreement) ownership of the home reverts fully to the seller.
One caveat here, It is very risky for a seller to take back a second note as downpayment when a first mortgage is held by a Lender. The Mortgage Lender/Bank will be compensated in first place should the buyer default on their loan.
Reprinted with permission from RISMedia. ©2016. All rights reserved.
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