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 days
- 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, financing
- 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)
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.
Do you need help structuring a loan, or getting a rate quote? Call me at (650) 222-0386, or e-mail me
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Phil, the risk here is that if the Buyer forecloses, your investment is all but lost. Second lienholders are receiving a pittance in short sale negotiations. Still, it is a creative solution that will definitely be a good idea for the right Seller and Buyer.
Frank & Sharon - You are right that is a risk. However, as a seller/lender, you can choose to lend however much you want, as long as the first mortgage lender is OK with it. If you are comfortable with only 70% in total loans outstanding, that is OK. On the higher first mortgage loan amounts (above $2 mil, for example), some lenders are only lending 60% of the purchase price.
now that was a GREAT READ. Thank you for posting this Phil. now I have to subscribe to you.
Phil, very creative to help both the seller and the buyer.
I have done this before where I carried 2nd and deferred 1st payment for two years so both could graduated from school. I loved it...great price...great rate...and I hoped they did miss a payment...not wishing bad things on them but it would have been good for me. I had a great experience. Also, I love lease with option.
This is a very good suggestion and a well presented post. I have a large listing and I will have to suggest to the seller he consider doing this.
I used to see this all the time. I dont see it now...but its something to keep in mind.
Hi Phil -- Great advice. Being creative and looking at all possible options helps to cast a wider net, which is needed to maximize market value.
Great post and this can be a great benefit for both buyers AND sellers to get what they are looking for.
Phil:
Thanks for this post; it is genius, and something I've been doing and recommending for years.
I am not aware of anyone (bank wise) allowing a seller carryback -- most of the major lenders dont allow this. Do you have lenders that do?
seller carrybacks are often subordinate to the first lien holder. in today's economy, why would anyone want to be in that position? A better idea is to promote assignable FHA mortgages - still low rates and much less hassle if the new buyer doesn't meet current FHA underwriting guidelines.
Phil, congrats on the feature! You wrote a clear, concise post about seller-carrybacks; I've bookmarked it to share with sellers. Thanks!
Phil, thank you very much for this information. I am new in the business and found it to be very helpful.
Regarding number 12 Weichert Realtors, FHA has a maximum amount that they will insure that is below the "Jumbo Rate" threashold, FHA isn't a solution for propertys in this price range.
Depending on your market, if values are falling, and your the not the primary mortgage, you might discover in a default (forclosure) situation that the value of the house won't be sufficient to pay off both the primary loan and the amount carried by the seller. At that point the seller looses out.
As an additional thought, FHA also must be the primary mortgage, they will not approve being in a subordinated role.
Daniel - thanks, I will subscribe to you also!
Rebecca - yes, we need to be creative, especially with financing for expensive homes.
Linda - you just gave me another idea for a blog post - lender requirements for a lease option. Thanks!
Lisa - Watch out for the Caulfields in the Chevy Chase area - those are my cousins!
Chuck - We're seeing some old tools come back, such as the seller carryback and buydown.
Chris - I don't think many sellers realize this is a way to increase the market value of their home, but I think it is a way because of the tough jumbo loan market we face.
Lane and Aaron - thanks for the compliments!
First Interstate Financial - Yes we do have banks that allow seller carrybacks here in CA.
Weichert Realtors - This article was directed more at jumbo financing, not FHA
Lottie - thanks for the compliment! I'm going to be at your office tomorrow for a presentation. Are you going to be there?
Mark - ActiveRain is a great way to educate yourself.
Gary - You are right, it is a risk, so this risk has to be considered carefully based on the buyer's offer.
Same principle as cosigning a loan. Only do it if you are prepared for the borrower to default.
You first.
It works. 1.) Perhaps you want to have someone service the note for you. It is well worth the fee. 2.) Make sure you have x amount of dollars in reserves as you can cure a foreclosing first mortgage and the begin foreclosure on your second.
Phil, I'm showing properties to a buyer tomorrow when you'll be at my office. Hope you get a good turnout of interested agents.
Sam - I disagree, it's not the same as co-signing a loan. You have the house as security. When you co-sign a loan you are the debtor also.
Michael - Great point!
Great post! I'm very familiar with seller carrybacks and have done them on investment properties that I've sold, but never really thought about how it could work on a high priced home to keep the buyer out of a jumbo product. Thanks for the insight!