Sometimes people have problems finding enough money for a down payment and closing costs. Even though many strive to put 20 percent down to get the best rate and to avoid private mortgage insurance, sometimes they fall short; right when their perfect dream home happens to be listed. But buyers don’t always have to wait to save up 20 percent for a down payment or use a HELOC; your seller can carry a second mortgage!
This is structured as an 80-10-10 transaction where the first mortgage is at 80 percent (or 75%) of the sales price of the home, the buyer puts down 10 percent of his or her own funds and the buyer obtains a second mortgage for the remaining 10 (15%) percent.
A second mortgage can come from a bank but it can also come from your seller. And given today’s current yields from stocks, bonds and other investments, a second mortgage can provide a nice monthly return to your sellers.
For example, a 30 year fixed rate loan of $300,000 might be available for 3.50 percent. The buyer can get a first mortgage of $240,000 and a second mortgage of $30,000, seller financed. The seller can issue most any rate they can think of but it needs to be competitive with other lenders in the area. For example, a second mortgage from a bank that’s a HELOC might be available for 4.990 – 6.000 percent. The seller can provide the same note or even a little lower. If the seller wanted to get a 5.75 percent return on their investments, a $30,000 second mortgage will do just fine.
The buyer needed secondary financing; the seller agreed and got a nifty 5.75 percent return. Compare that with a lowly CD rate today of 1.00 percent or so and you can see why this might be an option for your sellers.
Are you on the other side? Are your buyers in the market for a second mortgage? Then make an offer with seller financing as part of the package.
Sellers need to have an attorney draw up the note and ensure the closing complies with state and federal guidelines and there are other considerations. But for those who want to avoid PMI but with less than 20 percent down, seller financing is an option.