What Are the Lending Rules for Seller Carry Back Second Mortgages?
If you are having trouble qualifying for a mortgage, you may consider using a “seller carry.” This is a special situation that, depending on the details, could help you qualify for a mortgage that would otherwise be unavailable.
What is a Seller Carry Back?
Seller carry, also referred to as a “seller carry back loan,” is simply a situation where the owner of the property provides the mortgage financing instead of a lender or a bank. It’s also sometimes called “seller carry back financing” or “owner-will-carry” (OWC).
Owner carry backs work like this: if a homeowner wants to sell their home but is having trouble finding qualified borrowers, he or she can “carry” the note on their house. In this situation, the buyer and seller will sign a promissory note, which legally says that the buyer promises to pay a specific amount to the seller over a given period, usually with interest. Essentially, it’s like a mortgage, only the buyer makes payments to the owner instead of a bank. The seller will then move out and transfer the title to the buyer, with the condition that they can reclaim the property if payments are not made.
Seller carry does not always cover the entire cost of the home. Most often, the seller carry is for a portion of the purchase price to help the buyer get approved. Say, for example, a buyer has a 5% down payment but the loan the loan requires 10%. In this case, the seller may provide the remaining portion. The buyer now owes the seller for their portion, and this loan will be considered a seller carry second loan.
Lending institutions, however, have specific rules for when they will allow a seller carry second mortgage in addition to the loans they provide. Each is different, so let’s take a quick look at some of the rules from different organizations…
Lending Rules for Seller Carry Back Second Mortgages
Fannie Mae (Conventional Loans)
For loans backed by Fannie Mae, the main requirements are that the seller carry mortgage must have a minimum term of five years (which will reduce monthly payments), have a minimum interest-only payment, and meet market rates.
Also, if the first mortgage is subject to subordinate financing, the lender will have to calculate loan-to-value ratio and other factors. Variable-payment mortgages are acceptable, as are mortgages that have regular payments that cover at least the interest, which will ensure negative amortization won’t happen.
If the financing provided by the seller is over 2% below the current standard rate for second mortgages, the subordinate financing will need to be considered a sale concession and the subordinate financing will be deducted from the official sales price.
For FHA loans, the combined loan amount (the FHA-supported loan plus the seller carry loan) must be within the limit for the county. There are, however, limits on the combined loan-to-value ratio, which is based on the entity providing the subordinate financing. There are various restrictions for second loans given by government entities, family members, and non-profits, but for the seller, the base loan amount and secondary financing amount must not exceed the loan-to-value limit. For the maximum loan amount, the combined amount must not exceed the Nationwide Mortgage Limit for the area where the property is located.
The U.S. Department of Veterans Affairs allows seller carry second mortgages. The loans are allowed in addition to VA loans as long as the borrower is “not placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.” The additional loan must also meet specific requirements, including proper documentation, lien position (it must be subordinate to the VA loan), and interest rate restrictions.
According to the VA’s guidelines, the money from the seller carry second mortgage can be used for closing costs and down payments, but they cannot be used for portions of a down payment required by the VA that cover the excess of a purchase price over the VA’s limits.
The USDA is in a unique situation for seller carry second mortgages. Because they provide 100% financing, there is no need for this option. Therefore, the subject does not apply to loans that are supported by the USDA.
For loans provided by Chase Bank, the subordinate financing will not be eligible on all product or occupancy types, but you can use them for some of the loans that they provide. If the loan qualifies for seller carry, the interest rate will need to be at market value and, if the financing is more than 2% below the current market rate, it must be considered a sales concession and the amount will have to be deducted from the sales price.
Wells Fargo also offers this option, but financing from the seller is only allowed once the borrower has made a down payment of at least 5%. Also, the combined loan-to-value ratio must meet the published limits for the product being provided. The interest must be at market rate for the seller financing. Once again, if the interest rate is more than 2% below Fannie Mae’s official net yield, it must be treated as a sales concession, with reduction from the sales price.
The details for CIT Group, a major financial holding company, are simple. They do not allow for seller carry second mortgages on any of their loans. Their guidelines are clear, stating that “private second mortgages are not acceptable.” If you want to use a second carry, you’ll have to use another lending institution.
Providing Reliable Support, Expert Assistance for All Mortgages
If you want more details on seller carry second mortgages, contact the helpful team at San Diego Purchase Loans. We’ll help you understand the benefits, and risks, involved in seller carry so you can make the right decision.
From useful advice to final mortgage approval, we will be proud to help you secure the right loan for your financial future.