Real Estate Solutions
Seller Carry Back Mortgages – Real Estate Solutions For Buyers and Sellers
By Simon Volkov
Seller carry back mortgages are a form of financing used in real estate transactions. Sellers can carry the entire purchase price or a portion of the amount. Most sellers will finance 10 to 30-percent of the loan and require buyers to obtain traditional financing for the balance.
Seller carry back mortgages are a great option for buyers who have less than perfect credit. Typically, buyers pay the seller a down payment toward the purchase of the property. The buyer then makes monthly payments until the note is paid in full.
If the buyer obtains financing for part of the loan, the seller becomes the second mortgage holder. If the buyer becomes delinquent on the mortgage note and the property falls into foreclosure, the seller runs the risk of being unable to collect.
Buyers who enter into seller carry back agreements also assume risk. If the seller holds a mortgage on the property and defaults on payments, the buyer could potentially lose all vested monies. Therefore, it is crucial that both parties execute legal documents outlining the terms of the real estate agreement.
In most cases, seller carry back financing lasts between two and five years. This allows the buyer to eliminate negative reporting on their credit history and establish a proof of timely payments to the buyer. Buyers should always submit payments via personal check which can be validated by banking institutions.
If buyers do not have a checking account, the next best option is to obtain a cashier or certified check from a bank. Money orders can be used as a last resort; however, these documents are harder to track unless the seller is willing to provide documentation the payment was received. Mortgage payments should never be paid in cash unless a notarized statement is provided.
Seller financed mortgages offer enormous benefits to both parties involved; as long as the arrangement is properly documented. Although certain rules and restrictions apply, seller financing allows room for flexibility and can be drafted to suit everyone’s needs.
Sellers are allowed to charge interest on carry back mortgage notes. Each state must adhere to usury laws which specify the maximum rate of interest lenders are allowed to charge. Individuals providing private financing are required to charge a lower interest rate than banks and mortgage lenders.
Late fees are also regulated by usury laws and cannot exceed ten percent of the monthly payment. Charging higher interest rates or late fees than established by usury laws is illegal and can result in imprisonment. Therefore, it is crucial to adhere to state laws when engaging in seller carry back financing.
Crafting a rock-solid, legally binding mortgage agreement generally requires the services of a real estate attorney. At minimum, a lawyer should review the agreement prior to signing any real estate transactions.
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