Seller Financed Mortgage Notes

 A common way a house is sold is for the buyer to put some money down on the purchase and borrowing the rest from a bank. In some situations, the buyer for various reasons, might be unable to obtain traditional financing and in some cases the owner is willing to provide some buyer the financing. There are few labels that are used in this particular transaction. In some quarters, this might be called "carry back" note because the homeowner is taking back a note instead of full payment. Another name used is "seller financing".

No matter what you call it, one might wonder why a seller would be willing to finance a buyer when the banks are not willing to do the same. Specially in today's economic climate, even though we are at historic lows for mortgage rates or maybe because of it, banks are extremely stringent with their underwriting criteria. They are looking for folks that have a high FICO score, w-2 income above a certain ratio to cover the monthly mortgage payment and a healthy bank account balance even after the estimated down payment is withdrawn. In some cases, where the potential buyer meets a lot of these criteria but not necessarily all of them, a homeowner might be willing to overlook some of these faults specially if the buyer is willing to compromise some. As an example, let's say a potential buyer can demonstrate a lot of assets but cannot necessarily show a high w-2 income. The seller might still be willing to take a risk on such a buyer specially if the buyer is willing to put down say 50% of the purchase price instead of the traditional 20% to 30% down for a conventional loan or 3.5% for an FHA loan. By demanding such a high down payment, the seller gets equity protection, in case the buyer stops paying the mortgage and they can maximize the probability that they will not lose any money even if the new owner decides to stop paying.

The terms of the loan can sometimes become quite creative, but make sure to check with an attorney to make sure your documentation is in compliance with state and federal regulations. In the majority of states there are certain limits for the number of notes an individual or corporation can originate before they have to be registered and licensed to do so. Some of the variables that can be tweaked are:

• Interest Rate. For example if the seller is eager to close the deal, they might offer no interest for the term of the loan or no interest for the initial first few years. Or the seller might offer a high interest initially and agree to lower the interest for the later years.
• Balloon Payment. In order to keep the monthly payments low, there could be a balloon payment at the end of the a certain period. There might be clauses to allow the buyer to roll over the balloon and continue making payments.
• Interest Only Payments. The terms of the note might be such that for a certain period of time, only interest is due and after a certain period, the payment will go up to include principal.

One precaution that should always be taken is to record the mortgage at your county clerk's office. By doing so, the seller will ensure that the property does not get sold without someone first satisfying the remaining balance on the mortgage.

Once the note is in place, there are companies that specialize in purchasing carry-back notes. This can be useful when the seller wants to get a lump sum payment instead of the monthly payments specified in the terms of the note. Normally the buyers of these notes will offer a percentage of the unpaid balance and the seller often has to sell the note at a discount of the unpaid balance in order to get offers for their note. But this can be a great way to get cash out the transaction. In some cases, a note buyer might agree to buy a portion of the note and agree to only take say the first 100 payments. This can be useful when the home seller only needs a certain amount of money and does not necessarily want to sell the whole note.