Seller Financing for down payment?

13 Replies

So I know that you can do this, but I'm curious as to how.

If I wanted to buy a house, but didn't want to tie my money up in it so I wanted to ask the seller to finance the down payment, then how would I do this?

For example, if I had a $100k house I wanted to buy with a traditional mortgage with 20% down, but I didn't want to put my own money in it.
So I ask the seller to pay the down payment of $20k, and I'd repay them at 10% interest for to be paid off in 5 years.

First, is this realistic to ask for something like this from a seller? Would a mortgage lender be ok with me doing this?

Also, what would the order of payments be? Here's what I assume: the lender gives the seller $80k and thats it. Then I just pay the seller the monthly payment for the next 5 years on that $20k.

So in the end,  I'd come out with two loans, a 30 year loan for $80k at the mortgage interest rate and a 5 year loan for $20k at the 10% negotiated rate.

My second part of the question is where does the risk fall? If I am unable to pay the payments, I would think that the mortgage lender has the right to forclose on the house. But what right does the seller who financed $20k have if I was not able to pay? Is that just the risk the seller is taking? Or would they have a claim to anything if I stopped paying the loan back?

Or on the flip side, if I wanted to pay the $20k early, would that be ok in an average deal like this?

A final part of my question, how would one ho about doing this deal? Would a real estate attorney be able to take care of all of this, are there agencies specific to this type of work?

Originally posted by @Andy Thoman :

So I know that you can do this, but I'm curious as to how.

If I wanted to buy a house, but didn't want to tie my money up in it so I wanted to ask the seller to finance the down payment, then how would I do this?

For example, if I had a $100k house I wanted to buy with a traditional mortgage with 20% down, but I didn't want to put my own money in it.
So I ask the seller to pay the down payment of $20k, and I'd repay them at 10% interest for to be paid off in 5 years.

First, is this realistic to ask for something like this from a seller? Would a mortgage lender be ok with me doing this?

Also, what would the order of payments be? Here's what I assume: the lender gives the seller $80k and thats it. Then I just pay the seller the monthly payment for the next 5 years on that $20k.

So in the end,  I'd come out with two loans, a 30 year loan for $80k at the mortgage interest rate and a 5 year loan for $20k at the 10% negotiated rate.

My second part of the question is where does the risk fall? If I am unable to pay the payments, I would think that the mortgage lender has the right to forclose on the house. But what right does the seller who financed $20k have if I was not able to pay? Is that just the risk the seller is taking? Or would they have a claim to anything if I stopped paying the loan back?

Or on the flip side, if I wanted to pay the $20k early, would that be ok in an average deal like this?

A final part of my question, how would one ho about doing this deal? Would a real estate attorney be able to take care of all of this, are there agencies specific to this type of work?

 The issue is finding a bank that will allow it.  I have yet to find one in the 20+ banks I have talked with as the guidelines stipulate that only a small percentage (3% - 5%) of the purchase can be funds that are not yours.

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)

I agree the issue will be to find a bank that will be okay with this.  If the seller held a second mortgage After closing I don't see how the bank would be able to stop this.  In this case, you would have to come up with the 20K which would then be repaid within a few days by the seller.  

Another idea would be to have the seller give you a 20K mortgage on a different property of yours.  (remember the bank lender will take this debt into consideration if it happens at the same time or before closing)

I've done similar to what you are looking to do, but you have to make sure you are not getting yourself over-leveraged and there is enough cash flow because you have an obligation to pay the money even when the unit is empty.  

Originally posted by @Brie Schmidt :
Originally posted by @Andy Thoman:

So I know that you can do this, but I'm curious as to how.

If I wanted to buy a house, but didn't want to tie my money up in it so I wanted to ask the seller to finance the down payment, then how would I do this?

For example, if I had a $100k house I wanted to buy with a traditional mortgage with 20% down, but I didn't want to put my own money in it.
So I ask the seller to pay the down payment of $20k, and I'd repay them at 10% interest for to be paid off in 5 years.

First, is this realistic to ask for something like this from a seller? Would a mortgage lender be ok with me doing this?

Also, what would the order of payments be? Here's what I assume: the lender gives the seller $80k and thats it. Then I just pay the seller the monthly payment for the next 5 years on that $20k.

So in the end,  I'd come out with two loans, a 30 year loan for $80k at the mortgage interest rate and a 5 year loan for $20k at the 10% negotiated rate.

My second part of the question is where does the risk fall? If I am unable to pay the payments, I would think that the mortgage lender has the right to forclose on the house. But what right does the seller who financed $20k have if I was not able to pay? Is that just the risk the seller is taking? Or would they have a claim to anything if I stopped paying the loan back?

Or on the flip side, if I wanted to pay the $20k early, would that be ok in an average deal like this?

A final part of my question, how would one ho about doing this deal? Would a real estate attorney be able to take care of all of this, are there agencies specific to this type of work?

 The issue is finding a bank that will allow it.  I have yet to find one in the 20+ banks I have talked with as the guidelines stipulate that only a small percentage (3% - 5%) of the purchase can be funds that are not yours.

How do they define what funds are yours?
I don't understand the logic in that though. Why does the bank care? If they're only loaning 80% and they have the right to forclose, it doesn't seem like they have much risk involved.
Are there other agencies aside from banks that might loan the 80% mortgage in this deal?

Andy, I'm certainly not an expert, but from what I have been told Brie is correct, you'd be hard pressed to find a lender willing to do this, and you do have to disclose this type of seller financing to the bank even if you have the cash in your account already and are just going to put the seller financed money back in your account to replace the down payment.

Having said that you might be better off getting a second lender like a private investor to cover the 20% however you couldn't use the property as collateral for a second lien unless the first lender is ok with it, or pull equity from another source if possible.

Do you have any other properties to pull equity from, or is this a fix and flip that you could build equity into?

Originally posted by @Adrian Smude :

I agree the issue will be to find a bank that will be okay with this.  If the seller held a second mortgage After closing I don't see how the bank would be able to stop this.  In this case, you would have to come up with the 20K which would then be repaid within a few days by the seller.  

Another idea would be to have the seller give you a 20K mortgage on a different property of yours.  (remember the bank lender will take this debt into consideration if it happens at the same time or before closing)

I've done similar to what you are looking to do, but you have to make sure you are not getting yourself over-leveraged and there is enough cash flow because you have an obligation to pay the money even when the unit is empty.  

 What was your process of doing this? Did you pay the 20k then get repayed in a couple days?
The thing I don't understand about 2 mortgages, who has the right to foreclosure? If the bank loaned me 80k, then a couple days later I got a loan for 20k on the house, then if I stopped paying, who gets to foreclose? It doesn't seem like the either party, especially the 80k financier would go for this. Or am I missing something that might make this a doable deal?

Originally posted by @Andy Thoman :
Originally posted by @Brie Schmidt:
Originally posted by @Andy Thoman:

So I know that you can do this, but I'm curious as to how.

If I wanted to buy a house, but didn't want to tie my money up in it so I wanted to ask the seller to finance the down payment, then how would I do this?

For example, if I had a $100k house I wanted to buy with a traditional mortgage with 20% down, but I didn't want to put my own money in it.
So I ask the seller to pay the down payment of $20k, and I'd repay them at 10% interest for to be paid off in 5 years.

First, is this realistic to ask for something like this from a seller? Would a mortgage lender be ok with me doing this?

Also, what would the order of payments be? Here's what I assume: the lender gives the seller $80k and thats it. Then I just pay the seller the monthly payment for the next 5 years on that $20k.

So in the end,  I'd come out with two loans, a 30 year loan for $80k at the mortgage interest rate and a 5 year loan for $20k at the 10% negotiated rate.

My second part of the question is where does the risk fall? If I am unable to pay the payments, I would think that the mortgage lender has the right to forclose on the house. But what right does the seller who financed $20k have if I was not able to pay? Is that just the risk the seller is taking? Or would they have a claim to anything if I stopped paying the loan back?

Or on the flip side, if I wanted to pay the $20k early, would that be ok in an average deal like this?

A final part of my question, how would one ho about doing this deal? Would a real estate attorney be able to take care of all of this, are there agencies specific to this type of work?

 The issue is finding a bank that will allow it.  I have yet to find one in the 20+ banks I have talked with as the guidelines stipulate that only a small percentage (3% - 5%) of the purchase can be funds that are not yours.

How do they define what funds are yours?
I don't understand the logic in that though. Why does the bank care? If they're only loaning 80% and they have the right to forclose, it doesn't seem like they have much risk involved.
Are there other agencies aside from banks that might loan the 80% mortgage in this deal?

The banks care how much risk is being taken on, and in their eyes too much debt on a property is bad even if it cashflows well. If the Buyer 100% finances a deal, there is more risk of foreclosure because they are paying back 2 debts, so a second lien would have to be disclosed(I assume this is in the paperwork for the loan you sign for), and banks don't like that.

Originally posted by @Zachary Bradigan :

Andy, I'm certainly not an expert, but from what I have been told Brie is correct, you'd be hard pressed to find a lender willing to do this, and you do have to disclose this type of seller financing to the bank even if you have the cash in your account already and are just going to put the seller financed money back in your account to replace the down payment.

Having said that you might be better off getting a second lender like a private investor to cover the 20% however you couldn't use the property as collateral for a second lien unless the first lender is ok with it, or pull equity from another source if possible.

Do you have any other properties to pull equity from, or is this a fix and flip that you could build equity into?

 I don't have a property that I'm looking to do this on. It is mostly a hypothetical question that I was wondering to help me understand leveraging better.

In the scenario, I'm not asking the seller to give me a mortgage, I'm asking them to act as a private investor to cover the 20%. For two reasons. First, it stops me from needing to put my cash into the purchase. Second, it could motivate the seller to sell at a lower price, because they'd make more money in the long run from the interest payments.

Originally posted by @Andy Thoman :
Originally posted by @Brie Schmidt:
Originally posted by @Andy Thoman:

So I know that you can do this, but I'm curious as to how.

If I wanted to buy a house, but didn't want to tie my money up in it so I wanted to ask the seller to finance the down payment, then how would I do this?

For example, if I had a $100k house I wanted to buy with a traditional mortgage with 20% down, but I didn't want to put my own money in it.
So I ask the seller to pay the down payment of $20k, and I'd repay them at 10% interest for to be paid off in 5 years.

First, is this realistic to ask for something like this from a seller? Would a mortgage lender be ok with me doing this?

Also, what would the order of payments be? Here's what I assume: the lender gives the seller $80k and thats it. Then I just pay the seller the monthly payment for the next 5 years on that $20k.

So in the end,  I'd come out with two loans, a 30 year loan for $80k at the mortgage interest rate and a 5 year loan for $20k at the 10% negotiated rate.

My second part of the question is where does the risk fall? If I am unable to pay the payments, I would think that the mortgage lender has the right to forclose on the house. But what right does the seller who financed $20k have if I was not able to pay? Is that just the risk the seller is taking? Or would they have a claim to anything if I stopped paying the loan back?

Or on the flip side, if I wanted to pay the $20k early, would that be ok in an average deal like this?

A final part of my question, how would one ho about doing this deal? Would a real estate attorney be able to take care of all of this, are there agencies specific to this type of work?

 The issue is finding a bank that will allow it.  I have yet to find one in the 20+ banks I have talked with as the guidelines stipulate that only a small percentage (3% - 5%) of the purchase can be funds that are not yours.

How do they define what funds are yours?
I don't understand the logic in that though. Why does the bank care? If they're only loaning 80% and they have the right to forclose, it doesn't seem like they have much risk involved.
Are there other agencies aside from banks that might loan the 80% mortgage in this deal?

 You have to supply bank statement when you apply for the loan - any deposit over 15% of your monthly income requires a letter of explanation.

The bank cares because if you have nothing at risk - what is going to make sure you pay

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)
Originally posted by @Andy Thoman :
Originally posted by @Zachary Bradigan:

Andy, I'm certainly not an expert, but from what I have been told Brie is correct, you'd be hard pressed to find a lender willing to do this, and you do have to disclose this type of seller financing to the bank even if you have the cash in your account already and are just going to put the seller financed money back in your account to replace the down payment.

Having said that you might be better off getting a second lender like a private investor to cover the 20% however you couldn't use the property as collateral for a second lien unless the first lender is ok with it, or pull equity from another source if possible.

Do you have any other properties to pull equity from, or is this a fix and flip that you could build equity into?

 I don't have a property that I'm looking to do this on. It is mostly a hypothetical question that I was wondering to help me understand leveraging better.

In the scenario, I'm not asking the seller to give me a mortgage, I'm asking them to act as a private investor to cover the 20%. For two reasons. First, it stops me from needing to put my cash into the purchase. Second, it could motivate the seller to sell at a lower price, because they'd make more money in the long run from the interest payments.

 Its a problem of risk, banks think over-leveraging is too risky. At the end of the day if they thought leverage over 80% wasn't too risky, they would lend on homes that way themselves to make even more.

Originally posted by @Zachary Bradigan:
Originally posted by @Andy Thoman:
Originally posted by @Zachary Bradigan:

Andy, I'm certainly not an expert, but from what I have been told Brie is correct, you'd be hard pressed to find a lender willing to do this, and you do have to disclose this type of seller financing to the bank even if you have the cash in your account already and are just going to put the seller financed money back in your account to replace the down payment.

Having said that you might be better off getting a second lender like a private investor to cover the 20% however you couldn't use the property as collateral for a second lien unless the first lender is ok with it, or pull equity from another source if possible.

Do you have any other properties to pull equity from, or is this a fix and flip that you could build equity into?

 I don't have a property that I'm looking to do this on. It is mostly a hypothetical question that I was wondering to help me understand leveraging better.

In the scenario, I'm not asking the seller to give me a mortgage, I'm asking them to act as a private investor to cover the 20%. For two reasons. First, it stops me from needing to put my cash into the purchase. Second, it could motivate the seller to sell at a lower price, because they'd make more money in the long run from the interest payments.

 Its a problem of risk, banks think over-leveraging is too risky. At the end of the day if they thought leverage over 80% wasn't too risky, they would lend on homes that way themselves to make even more.

 And, I might add, they did this at one point in time. The pre-mortgage crisis lending was much higher leverage even for investment properties, and once the bottom fell out of the home prices the banks could not foreclose and sell the property to get back the debt that was owed, so they lost big time.

Originally posted by @Andy Thoman :
Originally posted by @Adrian Smude:

I agree the issue will be to find a bank that will be okay with this.  If the seller held a second mortgage After closing I don't see how the bank would be able to stop this.  In this case, you would have to come up with the 20K which would then be repaid within a few days by the seller.  

Another idea would be to have the seller give you a 20K mortgage on a different property of yours.  (remember the bank lender will take this debt into consideration if it happens at the same time or before closing)

I've done similar to what you are looking to do, but you have to make sure you are not getting yourself over-leveraged and there is enough cash flow because you have an obligation to pay the money even when the unit is empty.  

 What was your process of doing this? Did you pay the 20k then get repayed in a couple days?
The thing I don't understand about 2 mortgages, who has the right to foreclosure? If the bank loaned me 80k, then a couple days later I got a loan for 20k on the house, then if I stopped paying, who gets to foreclose? It doesn't seem like the either party, especially the 80k financier would go for this. Or am I missing something that might make this a doable deal?

Whichever mortgage is recorded first is in the first position.  Literally, if you bring both mortgages down to be recorded at the same time the first that is taken in is in the first position.  

@Andy Thoman you are getting some good feedback. 

We have done all of our financing through Commercial Portfolio lenders as we use an LLC to hold or properties (3 partners). Our lender for those, who we have a good track record with, is willing to consider it. We have also talked about us doing 10% and a second for 10%, or bringing on a partner for the 20% down (most likely using their SDIRA) and us signing on the loan.

The 'catch' with these is that 1) We have a proven track record with them 2) Our DSCR would have to stay at 1.20 or better when ALL loans are taken into account 3) The terms are not as good as conventional - 5.125% fixed for 10 years and amortized over 25 years.

Dan Dietz

608-524-4899

@Andy Thoman I like your thinking. I’ve been very successful doing this with my first 4 buildings. I’ve just asked the question to the sellers. More sellers than you think are willing to hold paper. I’ve never offered more than 6%, a 20 year amortization with a 10 year balloon. My most recent acquisition was a $995k mixed use building that the seller financed $313k to get the deal done. I used $10k of my own cash. Good luck to you!

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