seller financing with balloon payment. help!

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seller financing with balloon payment. help!

Paul Kit
granger, IN · Member since 2018 · 37 posts · 3 votes

please bear with my stupid question. I am learning.

Seller offer seller financing with 15-20 years amortization and 10 years balloon. Is it better than a fixed 15-20 years term?

What should I concern?

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Tom Shallcross
Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
7y

Hi @Paul Kit, a 20yr amortization with a 10 year balloon will have payments equal to a 20yr loan but the loan will come due in it's entirety after 10years.   For example, if you have a 100k loan on a 20 year amortization with a 10yr balloon at a 5% rate, your monthly principal/interest payments would be $660.  After making this payment for 10 years you would still owe roughly 61k which would come due on your 121st payment (1st payment after ten years) 

It's much better to have the straight 15-20 year term as you won't have to worry about the balloon coming due.  

However, if your only option is a 20yr amortization with a 10yr balloon, you can still make this work.  You just have to have an exit strategy to refi out of this financing situation within 10yrs.   Some folks refinance out of this (make sure you don't have a prepayment penalty on the seller financing) while others treat the loan like a ten year loan.  Going back to my 100k example, instead of making payments of 660, make payments of 1060 and the loan is paid off in 10 years.  This sounds great in theory but probably destroys your cashflow.

FWIW I would highly suggest avoiding balloon payments, especially the newer you are to this.    

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  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
    7y

    Hi @Paul Kit, a 20yr amortization with a 10 year balloon will have payments equal to a 20yr loan but the loan will come due in it's entirety after 10years.   For example, if you have a 100k loan on a 20 year amortization with a 10yr balloon at a 5% rate, your monthly principal/interest payments would be $660.  After making this payment for 10 years you would still owe roughly 61k which would come due on your 121st payment (1st payment after ten years) 

    It's much better to have the straight 15-20 year term as you won't have to worry about the balloon coming due.  

    However, if your only option is a 20yr amortization with a 10yr balloon, you can still make this work.  You just have to have an exit strategy to refi out of this financing situation within 10yrs.   Some folks refinance out of this (make sure you don't have a prepayment penalty on the seller financing) while others treat the loan like a ten year loan.  Going back to my 100k example, instead of making payments of 660, make payments of 1060 and the loan is paid off in 10 years.  This sounds great in theory but probably destroys your cashflow.

    FWIW I would highly suggest avoiding balloon payments, especially the newer you are to this.    

    5Reply
  • Melvin ListBusiness Member
    Lender · Tampa, FL · Member since 2016 · 1k+ posts · 381 votes
    7y

    @Paul Kit this is not uncommon with seller financing.  The seller is basically telling you "Yes" he would like money off of the interest but he does not want to hold the note for a over 2 decades.  I would have an exit strategy before the balloon comes due.

    C2 Financial
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    2Reply
  • Paul Kit
    OP
    granger, IN · Member since 2018 · 37 posts · 3 votes
    7y

    Tom, Kelvin, thank you so much for your input

    What's the market rate for balloon payment nowadays?

    1Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Paul,

    The 10yr balloon is not a bad deal.  Most seller finance deals have shorter periods of time 3-5yr balloon payments.  If the house and rate is a great deal go for it.  You can sell the property in 10yrs, you can refinance the property, or you can pay it off.  Lots of options and time to figure it out.

    5Reply
  • Paul Kit
    OP
    granger, IN · Member since 2018 · 37 posts · 3 votes
    7y

    @Frank Wong@Melvin List@Tom Shallcross If the seller financing is 2nd mortgage and the local bank is 1st mortgage, do the two mortgage need to be in the same balloon period?  Can the seller finance has 10 yr balloon and local bank has 5 year balloon?

    0Reply
  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
    7y

    Paul - the 2nd mortgage from the seller is not tied to the 1st mortgage with the bank.  The bank is going to give you a loan for X and sounds like you'll want to make up the difference (your down payment) with seller financing.  You and the seller negotiate the terms of seller financing and the 1st mortgage provider does not need to get involved.  So yes, the balloon payments can come due at different periods in time.  

    Also, if this is 4 units or less, you should be able to get a 1st mortgage without a balloon payment and only have to worry about the requested balloon from the seller. 

    0Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Paul,

    If you are getting a first with a bank and a 2nd with the seller. You need to check with the bank to see if they will allow a 2nd on the property. There is certain CLTV combine loan to value restrictions the bank will have.

    0Reply
  • Paul Kit
    OP
    granger, IN · Member since 2018 · 37 posts · 3 votes
    7y

    @Tom Shallcross  So I refinance, if the 1st mortgage come due first let say at year 5, How the refinance works if the seller finance is due later at year 10? It's a loaded question. Appreciate your help!!

    0Reply
  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 613 posts · 1k+ votes
    7y

    @Frank Wong - in your above comment are you stating the 1st mortgage lender can shutdown a potential second mortgage loan?  I was not aware of this and I've definitely done promissory notes in second position without informing my first position lien.  Is this something I need to adjust moving forward? 

    0Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    @Tom Shallcross

    What I am saying is the first mortgage won't lend on the house knowing that there will be a 2nd mortgage if the CLTV of the purchase exceeds the bank's requirements. You must check with your bank. What I am helping Paul here is that he needs to check everything. Just because he and the seller agree to do a 2nd doesn't mean the bank will be OK with it. Especially if he is doing purchase loan.

    3Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    7y

    Absolutely agree with Frank's comments above - some banks will put in language stating there cannot be a 2nd mortgage on the property.  And especially if you're doing a purchase combining a 1st from the bank and a 2nd from the seller, if you don't tell the bank, of course they're going to wonder when the downpayment funds are coming form.

    1Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    7y

    @Tom Shallcross @Paul Kit  Forgot to mention you in my post above.

    1Reply
  • Account Closed
    Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    Seller offer seller financing with 15-20 years amortization and 10 years balloon. Is it better than a fixed 15-20 years term?

    Heck yes! Anytime a seller offers seller financing - that is great - why put yourself thru the stuff that lenders require -- sellers don't  intimated you or make you bag for a loan, or require you to give them information about everything but your sex life, keep you waiting for 3 months and finally ask you for more information and turn you down for some stupid reason. I am no fan of banks.

    Some ideas when negotiating for seller financing:

    • Offer to give them more for a principal mortgage (no interest)
    • Build in a discount for early pay off
    • It should be a subordinated mortgage (meaning you can place that mortgage in a lower position) if you decide to refinance and the bank wants first position.
    • Put in a "substation of Collateral" clause - meaning you can "walk" the mortgage to another property if you sell the property and won't have to pay it off - it will just be on another property with suitable collateral.
    • As for 11 payments a year instead of 12 (Xmas bonus)

    Good luck with your deal ---- Charles

    1Reply
  • Daniel Zwick
    Lender · Iowa City, IA · Member since 2018 · 17 posts · 4 votes
    7y

    @Paul Kit

    I just refinanced a group of properties that had seller financing attached. Both had balloon payments due in year 5 (this is year 3) but but I only refinanced the 1st position with the local bank and was able to leave the seller financed portion untouched. Just talk with your bank and be upfront. The seller financed loan did exceed their LTV requirements but since they still maintained 1st position they were ok with it. I just had to have the seller agree again to subordinate to their 1st position. I suggest always being upfront about these things with your bank. If they won't work with you on it just keep talking to banks until you find one that does.

    Best of luck

    0Reply
  • Paul Kit
    OP
    granger, IN · Member since 2018 · 37 posts · 3 votes
    7y

    the respond is overwhelming. Thank you everyone for spending time giving me good advice.

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    Majority caught during the disastrous recession was non fixed rate mortgage, interest only, variable with much higher interest or balloon payment due..... The number was 8,000,000 home American owners lost their homes with low or no down for refin.

    0Reply
  • Paul Kit
    OP
    granger, IN · Member since 2018 · 37 posts · 3 votes
    7y

    appreciate all the input. Thank you so much !

    0Reply
  • Asher Knudson
    Minneapolis, MN · Member since 2019 · 32 posts · 4 votes
    7y

    I know this is an old discussion but this is very interesting.

    Does anyone know how soon you can refinance an owner financing loan with a balloon payment?

    0Reply
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