A seller held Second Mortgage might offer a good solution.

Over the past few years the use of second mortgages in combination with a first mortgage became a very popular method of financing.  Home purchasers found this as an attractive way of escaping the high cost of private mortgage insurance.  We commonly call these loans 80/10/10 (80% first mortgage, 10% second and 10% down payment).  As these became popular, lenders began to expand these second mortgage offerings to include 75/25 (combined 100% loan to value transaction), 80/15/5 ( 95% total loan to value transaction).

As the effects of  sub prime lending has come into focus, underwriting these loans has had a ripple effect through out the mortgage industry.  Because second mortgages were often used in combination with these loans, they too became very restrictive not only on a loan to value basis but also documentation type.  This has had a negative effect not only on self employed and commissioned borrowers but also for the average home buyer.  With interest rates on second mortgages over 10 % and rising first mortgage rates, it is getting increasingly difficult for borrowers to access the credit capital needed to complete a blended financing solution.

In the past several years Fannie Mae (FNMA) and Freddie Mac (FHLMC) have set guidelines for second mortgages and their use in combination with a first mortgage to purchase property.  In these guidelines are rules for the seller of the property to hold a second lien position to thier first mortgage, under certain criteria:

• The note rate can not be lower than the rate of the first mortgage.
• There can be no balloon payment within the first five years.
• The note can not have a prepayment penalty.
• The second can not "wrap around" the first mortgage. (In other words the second mortgage can not encompass the first mortgage lien being paid off).

Sellers however, can use this tool to their advantage.  Because FNMA and FHLMC only loan money to credit worthy people you can attract a higher credit quality buyer (this lowers the risk of default), the seller develops a income stream from the interest earned on a second mortgage (thus offsetting any reduction in sales price), and their money is protected by having a secured lien position on the property.

Home sellers who are looking for solutions that do not involve major reductions in sales price might find what they are looking for in a seller held second.  As with any financial transaction there are risks.  I recommend consulting a qualified Real Estate Attorney and tax advisor before making any decisions.

For more Information on me and Mortgage Lending solutions please visit http://www.theresponsiblemortgagelender.com/  

Michael Mapes

The Responsible Mortgage Lender

Licensed in all 50 states as a Mortgage Banker.