Seller financing and using a regular mortgage loan together?

Question

Hey guys I was looking into properties which are owned free and clear. I was wondering if I put in an offer and requested seller financing could I use a loan like FHA, Conventional, etc. for a down payment? For example a property is for sale at 200k and I request seller financing offering 200k with a 50k down payment. Could I use a FHA or conventional loan for the down payment? What are the risks for the seller if for any reason the property forecloses? What are possible benefits for the seller? Thank you in advance!

Kevin Quintanilla-Toledo · Answer

@Kevin Romines @Andrew Postel Thank you guys for clarifying. My point of this question was to buy a property with as little cash upfront. The BRRRR method is amazing and my issue is qualifying for another loan right now. I just recently bought my second property and I am owner occupying it. I used the VA loan on it so I did not pay anything to get into the home. I was looking for a way to make it more attractive to a seller for example if someone came up to you and said hey I would love to buy your property but pay no money down oh and could you seller finance this deal? To most sellers including myself I would laugh and not entertain the offer. But if I could bring at least 20% cash of the purchase price or more to the seller upfront that would be more attractive. Loan wise since the loan amount I would be requesting is significantly lower than the value of the home in theory I could pay the down payment required and avoid pmi if I used a conventional loan. But since I am not a lender I am seeing if any of this is possible.

Andrew Postell · Answer

@Kevin Quintanilla-Toledo this was addressed above but just wanted to add some clarification here just in case - the FHA, Conventional loan would be your main loan...and the other "owner financed" loan would be the 2nd loan.  You would have to still obey the "Combined Loan To Value" (CLTV) limits of the loan type...but it is possible.  HOWEVER, since we do have to obey the CLTV limits...there is no reason to do this.  Let's use Fannie/Freddie for example, their CLTV for a single family investment property is 85%....but they will lend up to 85% already with just their first loan.  So if they can give you 85%....then there's no reason to have an owner financed 2nd that will only provide you with....85% CLTV.  I hope this makes sense how I am describing it.

So, how do we buy properties with a lower down payment or less out of our pocket?

The answer is the BRRRR method. That's the whole point of BRRRR.  It keeps our out of pocket costs lower than buying a property with a down payment requirement.  You local a challenge property, usually off market, you buy it at a deep discount, rehab it, rent it, refinance it, then repeat.  And the main secret here is buying and rehabbing somewhere around 70%-80% of ARV.   This is because most of your "acquisition" loans will lend you 75% of the ARV....so if you can buy and rehab at 75%...then in theory, you come out of pocket $0!  Let's say you have to buy and rehab at 80%...well, your still at only 5% out of pocket.  I hope this is all making sense.  But this is how we limit our out of pocket costs.

Feel free to ask anything else.  Thanks!

Tom S. · Answer

@Kevin Quintanilla-Toledo  I've never seen this allowed with a conventional mortgage, in my personal experience at least.  With commercial loans, yes.

Kevin Romines · Answer

Hi Kevin, what you are referring to is subordinate financing. It can be done, but certain lenders will have overlays that will not allow them to do them, even though Fannie Mae will allow them to the max. of their CLTV limits.

In this case, the loan through the lender must be in 1st lien position. The sellers note will then be in 2nd mortgage position. So its a risk to the seller. It may not cover 100% of the purchase price, but there may be some loans that allow it to cover up to 100%. You will have to do the research on that.

Below is a link for Fannie Mae's guidelines on subordinate financing.

https://www.fanniemae.com/cont...