An Overview of Seller Carry Back Financing

What is seller carry back financing? This mortgage alternative is a financial arrangement between the seller and the buyer when the buyer cannot secure financing through a bank. The seller of the home or property agrees to “carry back” the loan and the buyer makes payments directly to the seller. The seller receives the interest that would have gone to the bank and is then able to receive more for the sale of the home than if the financing had gone through a bank or other mortgage lender.

Who Benefits From this Arrangement?

The seller and the buyer can both benefit from the loan arrangement. There are many circumstances that could make it difficult for a buyer to get a loan through a bank. They may not have an established credit history or they could have multiple properties. Rather than seeking a portfolio loan, the buyer might ask the seller to consider seller carry back financing.

Why Would a Seller Consider This Financing Method?

The seller also benefits. If finding qualified buyers is difficult, the carry back financing could provide a way to entice buyers. Sellers are also able to seek a high interest rate (higher than those traditionally linked to mortgage loans) and will see financial rewards because of that.

How Can Buyers and Sellers Avoid Risks?

There may be some hesitation on the part of sellers who aren’t sure that they are comfortable with financial risks. However, sellers can work through an attorney or use a local-government-approved contract. They can and should also obtain written permission from the buyer to pull the buyer’s credit report. It’s helpful for the seller to seek a fairly high down payment, maybe as much as 20 percent. This is important for two reasons. Sellers may find that when the title is transferred, their due-on-sale clause goes into effect. The remainder of the seller’s loan must then be paid in full. The second reason to seek a high down payment is for security. The buyer is less likely to neglect their monthly payments and simply walk away if they’ve made an investment in the home.

Final Considerations

Seller carry back financing can be good for communities as a whole. They work to stimulate an increased number of real estate transactions. However, within the past several years, some legislation has made it more difficult for sellers to offer this option. If you believe it may be an appropriate option for you, be sure to carefully research the situation before moving forward.


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