In some cases, a seller may agree to make a loan to a home buyer to help them purchase the home. Sellers who agree to a seller-assisted mortgage, or a seller carry-back, finance all or part of the purchase price and receive documentation of the terms and conditions of the loan.
In most cases seller carry-backs are recorded in the public records and take the form of a lease purchase, land contract, trust deed or mortgage, most of which are secured with a promissory note.
Buyers who do not meet lending requirements from a bank or credit union, or during times of high interest rates, may ask a seller to act as the bank and carry financing. If the home is owned free and clear, the seller may carry 100% of the financing or the buyer may obtain a conventional loan for part of the purchase and request the seller finance the rest.
If there is an existing mortgage on the property, the seller may allow the buyer to take over the payments, even though the loan remains in the seller's name.
There are disadvantages to this for the seller, however. The buyer may default on payments, for example, which forces the seller to initiate the foreclosure process. After foreclosure, the seller may not have any equity remaining in the home after making up payments to a lender (in the case of an existing loan) or paying commissions and closing costs. The seller will also have money tied up that is secured to the home.
There are many private investors who purchase seller carry-back instruments, usually for less than face value. Sellers may lose 10-30% of the unpaid balance, depending on many factors, such as seasoning (or how long the seller has been receiving payments), the interest rate, the mortgage term, prepayment penalties and late charges that are attractive to the investor, and the loan-to-value ratio.
Homebuyer can also expect several benefits to a seller-assisted mortgage.