More Seller Financing Options
Over the past couple of weeks we have been examining the some of the benefits and risk associated with creative alternatives to conventional financing. And, I hope that you have found the information helpful.
Today, we will explore two more methods to complete an otherwise difficult sale. They are the seller financing options of holding a first or second note on the property.
First you might wonder why anyone would want to carry the note on a home that they intend to sell. Great question. And the answer is more common than you might think. Let us assume that our seller is older and he holds title to his home free and clear. And, that he has sufficient assets to retire comfortably. Selling his home will provide him with cash he may not need at the time and expose him to tax liabilities that he does not want to pay at the moment.
In this scenario, if the seller decided to carry the note, he could structure the loan over thirty years, with an interest only payment and require that the note be paid off in five years.
This would preserve his equity position, provide the seller with passive income, and it is secured by a deed of trust which simply means that if the buyer defaults, the seller retains the right to foreclose and take the property back.
For the buyer, it means easier qualification criteria, an interest only payment that will be a lower payment than the fully amortized loan from a conventional lender. And, should the buyer have verifiable income but, poor credit. This scenario will allow the buyer to have all the benefits and incentives of homeownership while repairing his credit.
I have said many times that for any transaction to work it must have a “win-win” component to it. This one truly does. Because the seller, is able to sell but defer the tax liability to a future date. And, the buyer is provided the opportunity to purchase when he might not otherwise qualify.
It should be noted that in these types of transactions most sellers require a 10-20% down payment to consider the offer. It is a fact that buyers who have no skin in the game, are far more likely to walk away from their home in a difficult period than those who are well invested in the transaction.
In the nineties one of my favorite types of transactions was those which involved a seller financed second mortgage. At that time they were extremely common because in many transactions that was the only way a deal could be made.
This is because the interest rates were very high and the only way a buyer could qualify for financing was when the seller carried a second note at below market rates.
Today the guidelines for seller financed seconds have changed dramatically. So much so that I reached out to Craig Doty, from PrimeLending, a PlainsCapital Company, of Corona to get his feedback on these types of transactions in today’s market. The following were his comments.
“In the big picture, seller financing, also known as seller carry-backs, are still allowed. The primary advantage of using a seller carry-back with conventional financing is that it helps the homebuyer avoid paying private mortgage insurance on the underlying first mortgage, and all payments are therefore applied to principal and interest. In a high interest rate environment, if a seller agreed to provide a below-market interest rate, then a borrower who might not qualify at market rates may be able to obtain a loan with the lower rate offered by the seller.
These loan structures have also been popular with lenders because it lowers the lender’s risk and engaged a third party (the seller) to help ensure the homeowner made their payments. These loans are used less in markets with low equity or a high percentage of bank-owned homes.
A typical financing scenario would be a 5percent down payment from the buyer combined with 15percent seller carry back and the buyer obtains a first mortgage equal to 80percent of the purchase price (known as an 80-15-5). Also popular, is what we call an 80-10-10, where the buyer makes a 10percent down payment and the seller carries another 10percent and the buyer obtains an 80percent leverage first mortgage.
Seller carry-backs are not as popular with FHA loans because all FHA loans require mortgage insurance regardless of the buyers invested down payment.”
I hope that the past three weeks have demonstrated that there is always more than one way to skin a cat. When you are faced with obstacles that cannot be overcome any other way, you now have a couple new of tools that will allow you to get the job done.