More and more sellers are being asked to carry back a second mortgage for the buyer – especially with the banks still keeping a pretty tight reign on lending.
While seller financing can be a viable alternative to bank loans when it is the buyer’s primary obligation or first lien, a second lien has considerably more risk.
If you are asked to owner finance a small second behind the buyers bank loan weigh your options carefully and be sure to ask yourself these questions:
- Is this the only way the house will sell?
- What if you lower the sale price? Will you still receive enough money?
- Do you need the cash now? Are you ok getting payments over time instead?
- What if the buyer doesn’t make the payments? Are you prepared to foreclose on the property?
- Is the property worth enough to make foreclosing on the second lien worthwhile since you will need to pay for the first mortgage?
- Are you prepared to never get any of the money?
If you decide to carry back a second mortgage, make sure the buyers have good credit. Don’t take anyone’s word for it (that includes your Real Estate Agent). Ask to see a current credit report. You are carrying back the note (thereby extending the credit) and have the right to see the report.
Lastly, make the note fairly short term (two to five years) and be prepared to keep it until maturity. Selling a second mortgage to a note investor is unlikely to make sense. Most seconds, if purchased at all, will be for 20-cents to 50-cents on the dollar.
bill reinhardt says
Boy! Do i ever WANT a second mortgage… i own my $400K home outright and would love to make a sale to someone who is getting reamed by the real estate market today… make a deal made in heaven, if possible… but i need some “how to git-r-done” advice
….my super-scenario; i offer a “zero-cash down deal” at $400K …and my buyer will need to go get a First Mortgage, from any lender (like an Easy Orange loan from ING) for the first $250K ( ….62% LTV) and i would hold a second note for $150K for 5 years with “interest only payments @ 6% year ….
Payments on 1st note only $1000per/mo + $750 interets only payments on my second = $1750 per mo. P&I !!! …less than rent on my super home and i get 6% return on my note (…i’m retired and can use the mo. income)
PROBLEM; how can i structure the sale so buyers can ‘qualify’ for the 1st note (…most lenders will NOT allow the secondary financing to occur simutaneously at closing ….
Do you have any ideas on how we can do this deal…. Thanx
Inspiration By Experience says
It’s a good tip and important for someone who wants to have a mortgage