LA Times – Apr 15 1990 – DAVID W. MYERS
When most home buyers go looking for a loan, they visit the usual places: banks, savings and loan associations, mortgage-brokerage firms and the like.
But sometimes their best source of financing is right under their nose-the seller himself.
“Both the buyer and the seller can benefit from seller-financing,” said Larry Arman, a broker and owner of the Re/Max office in Rolling Hills Estates.
“The buyer gets the financing he needs to close the deal, while the seller gets to collect monthly payments at an interest rate that’s better than he’d get if he put his money into a bank.”
Seller-financing typically involves the use of a second mortgage, usually called a seller “take-back” or “carry-back.”
A typical seller-financing deal might work like this:
Buyer Baker wants to purchase a $150,000 home with a 10% down payment of $15,000. But the bank will only lend him $125,000 at a 10% interest rate, which would leave him $10,000 short.
To close the deal, Seller Smith could agree to take back a $10,000 second mortgage at a 12% annual rate, with interest-only payments due each month and a lump sum “balloon” payment of $10,000 due and payable in seven years.
Buyer Baker would make a payment of about $1,097 to the bank each month for his first mortgage loan. He would also write a second check to Smith for $100, representing interest on the second mortgage.
Baker would have seven years to come up with the $10,000, or could eventually refinance to pay Smith off.
The arrangement helps Baker because he gets to buy a house even though the bank wouldn’t finance the entire purchase.
Smith, meantime, makes $100 a month in interest earnings-much more than he would make if he put $10,000 into a savings account-and has the security of knowing that he can foreclose and get the home back if Baker doesn’t repay all the money.
Many realtors say that finding a seller who is willing to provide some of the financing has become easier over the last several months, thanks to the sales slowdown that has affected many areas in California and across the nation.
“There really wasn’t any seller-financing going on a year ago because the market was so incredibly hot that nobody really wanted to carry back a second,” said Tom Williams, a senior vice president with Coldwell Banker Residential Group.
“Now that sales have settled down a bit, we’re seeing more sellers offer to provide some financing because it makes their home a little easier to market.”
Sellers who are willing to help out with the financing usually say so in their newspaper advertisements, Williams said. The ads often use the initials OWC for “owner will carry.”
People who have had their home on the market for several months are also sometimes willing to provide seller-financing, as are workers who are being transferred out of town and need to sell their home fast.
Older sellers who own their homes free-and-clear and don’t need the sales proceeds in one big chunk are also good candidates.
“They’d get a lump sum payment as soon as escrow closes, and then collect payments on the mortgage they took back to supplement their monthly retirement income,” said Arman, the Re/Max broker.
Of course, there are a few drawbacks to financing a purchase with the help of a seller carry-back. You’ll have to make two payments each month instead of one, and the rate on the carry-back will likely be at least two points higher than the rate on the first mortgage.
More important, most lenders will consider the payment on the carry-back when they’re determining how big of a first mortgage you can get. As a result, the bank may decide to reduce the size of the loan that it will give you-and the seller would have to increase the size of his carry-back.
In fact, some financial institutions simply won’t loan money to borrowers who will also be paying on a carry-back, in part because lenders have trouble selling the loans on the secondary market.
That means that the bank will have to keep the loan on its books for years until you refinance, sell or pay off your mortgage-and many lenders don’t like to tie up their cash for that long.