For both buyers and sellers, this is a great option when practical. It can help bridge the gap between easier to obtain conventional, conforming financing and higher priced luxury properties.
Of course, it all needs to be disclosed to the first mortgage lender.
Are you aware how difficult it is to get a jumbo loan these days? If you are selling your jumbo loan sized home or listing one, what are you doing to make it easier for a long line of qualified buyers able to buy your home?
One strategy you may want to consider is a seller carryback. A seller carryback is financing by the seller, usually in the form of a second mortgage.
The easiest way to understand how a seller carryback works is to look at an example. Suppose you own a home worth $1 million. You owe $300,000. You plan to buy a new home for $1,500,000, and make a 25% down payment of $375,000.
Assuming a sale price of $1 million minus 7% selling costs, you net $930,000. If you pay off your $300,000 loan, you can net $630,000. You only need $375,000 for the down payment, plus $25,000 for closing costs, moving expenses, and a little vacation after all this stress! Now you have $230,000 left over. What are you going to do with these funds?
Suppose you offer a $230,000 seller carryback second mortgage. How does that benefit a buyer:
- A smaller down payment may be needed
- It takes the financing out of the jumbo category and puts it in the conforming category, which is easier to obtain
- It gets rid of the need for private mortgage insurance, which is an additional monthly cost to the buyer
- The buyer does not have to qualify for private mortgage insurance, which is very difficult these daysOK, you say, that is great for the buyer, but how does a seller carryback benefit me? Here's how:
- You get a higher yield than if you put the $230,000 in a low yielding account
- You have opened the door to a larger pool of qualified buyers to purchase your home, therefore
- You may be able to sell your home for a higher price because you have reduced the toughest barrier to purchase a home today, financingNow that we have the benefits of a seller carryback, let's talk about implementation. First, let's talk about what the first mortgage lenders usually require with a seller carryback:
- The term must be at least for 5 years
- There must be monthly payments (no deferral of payments)
- The payments must at least cover the interest
- The interest rate charged must be a "market" rate (I interpret this to mean not way lower or way higher than the current market rates)How do I make myself comfortable, you ask, that this buyer can make the payments? Well, the first mortgage lender will only approve the buyer if they are comfortable with the borrower's ability to pay. There is comfort in knowing that, especially today when almost all of the loans being approved are with full documentation.To make yourself more comfortable, you can write into your contract that you reserve the right to have a mortgage originator of your choice review the buyer's loan application and package. Be specific - ask to review current paystubs, two years of tax returns and w-2s, the most recent two months of bank statements, and a credit report.Staging your home, marketing it with massive exposure, and making it accessible are all important factors in getting your home sold. Equally as important, and I think even more important in these days of difficult to obtain mortgage financing, is to have a financing strategy in place to make it easier to buy for a larger number of people. The seller carryback is one tool, the seller buydown is another.Implement these strategies and sell your home fast for top dollar!