Seller Carry Back

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What You Should Know

  • A seller carry back mortgage is a mortgage provided by a seller for a buyer who cannot qualify for a mortgage from a traditional lender, such as a bank or credit union.
  • If the seller has not paid off their initial mortgage yet, they may let the buyer take over the payments and pay the seller the difference between the home price and the remaining mortgage payments
  • The interest rate on seller carry back mortgages is higher than traditional mortgages.
  • Sellers can sell the mortgage to private investors at a discount if they prefer a lump sum payment instead of periodic payments.

What is a Seller Carry Back Mortgage

When a homeowner wants to sell their home but a buyer does not have the funds to cover the whole transaction, carry back mortgages can be a solution to the problem. With a seller carry back mortgage, the seller takes the role of the bank and provides the buyer with a second loan that can cover some of the down payments and closing costs. In this case, a buyer is left with a Piggyback Loan where a mortgage is received from a lender and a second loan is received from the seller. This means that the buyer has to make mortgage payments to a lending institution and loan payments to the seller to cover the second loan. It is also possible to receive full seller financing, which eliminates the need for an institutional lender completely.

How Seller Carry Back Works Diagram
Advantages And Disadvantages of Seller Carry Back Financing
For Sellers
A Greater Pool Of BuyersRisk of Default
Higher PriceLoss of Equity
Better Rate of ReturnLack of Liquidity
Additional Stream of Income
Lower Capital Gains Taxes
For Buyers
Access to financingHigh Interest Rate
Faster And Cheaper ClosingRisk of Foreclosure
Flexible Down PaymentPossible Balloon Payments
Better Interest Rate for Some

If the seller has an existing mortgage, the seller may arrange for the buyer to take over the remaining balance of the mortgage payments and pay them the difference either through a lump sum or through a discount on a loan. The amount the buyer would pay as a loan in this scenario would be calculated as:

House Sale Price
Down Payment that the buyer makes to the seller
Seller's remaining existing loan
Loan that the seller gives to the buyer

How Do Seller Carry Back Mortgages Work?

Although seller carry back mortgages may not be as straightforward to find as conventional mortgages, it is still possible to understand the process. The following list provides a step-by-step guide on how to get a seller carry back a mortgage. It is important to note that every seller has different motivations for selling their property, so some sellers may reject the seller carry back offer because their objectives could not be met with the terms a seller carry back mortgage implies. Not every lender is willing to accept seller carry back loans for issuing the primary mortgage. It is important to ensure that the borrower’s lender accepts seller carry back loans before looking for one.

Steps To Getting A Seller Carry Back Loan Diagram

Step 1: Buyer And Seller Agree To a Carry Back Loan

When a buyer is looking for a second loan on their property, but conventional lenders are not willing to provide the loan, the buyer may resort to asking the seller directly for financing. In a buyer’s market where there are more houses available for sale than interested buyers, a seller may agree to provide the buyer a carry back mortgage.

Step 2: Seller Checks Buyer’s Creditworthiness

Even though the seller is aware that the buyer got rejected for a second loan, they will still need to know for themselves how reliable the buyer is in paying them back. To do this, the seller may ask for permission to pull the buyer’s credit report, similar to the steps that the banks follow when they provide mortgages. The seller can look at the history of payments by the buyer, if there have been any late payments on past debts or whether they have gone bankrupt. This will give the seller a clearer picture of the buyer’s creditworthiness.

Step 3: Buyer And Seller Negotiate Terms

Once the seller is satisfied with the buyer’s creditworthiness, the terms of the agreement can be negotiated. These include the interest rate, the down payment, the term of the loan, and other terms included in regular loans. Technically, the seller can ask for as big of a down payment and as high of a mortgage rate as they see fit, but it is negotiated with the buyer. On average, most of the seller carry back loans have interest rates from 9% to 16%. The seller may ask for a bigger than usual down payment when they have a mortgage on the property which includes a Due-on-Sale clause. Mortgages that contain a Due-on-Sale clause are not assumable. This means that the mortgage cannot be transferred to the new owner if the home is sold. If the homeowner wants to sell the house, they would first need to pay off the remaining balance on the mortgage completely. Sometimes, transferring the title of a house can trigger this clause.

The terms can also include what happens in the case that, at some point, the buyer fails to make the payments owed to the seller. In this scenario, the seller can foreclose and take the property back from the buyer.

Step 4: Parties Sign a Promissory Note

After the buyer and seller have agreed on the terms of the arrangement, they sign a promissory note. In the note, the buyer promises to pay an amount of money to the seller at a specific time with an agreed-upon interest rate.

Step 5: Seller Moves Out And Transfers Title

The next steps resemble that of a typical mortgage. The seller transfers the title of the property to the buyer and moves out of the house.

Step 6: Buyer Makes Periodic Payments To The Seller

Instead of making monthly payments to a traditional lender, the buyer makes mortgage payments to the seller. Just like in a regular mortgage, the seller can declare foreclosure if the buyer fails to hold to their end of the agreement and does not make the payments. It is also important to keep making payments to the first mortgage to avoid foreclosure.

Advantage of Seller Carry Back Mortgages

Both sellers and buyers can benefit from the seller carry back mortgage if it satisfies the interests of both parties. Buyers usually notify their lenders about a seller carry back loan agreement, so lenders may impose restrictive covenants that will ensure that there are no predatory lending practices included in the carry back agreement. A seller carry back loan may benefit both parties in the following ways:

Advantages for Sellers

There are certain benefits to sellers who provide a carry back loan. Some of these include:

  • A Greater Pool Of Buyers - Offering a seller carry back mortgage widens the pool of potential buyers. This happens because the category of people who would typically not have enough money to qualify for a mortgage, now have a financing option that may help them get the mortgage. This attracts more buyers to the property, thus increasing the seller’s chances of getting a good deal on the house.
  • Higher Price - Sellers that offer carry back mortgages typically charge a higher price on the house. The seller is providing the benefit of financing the buyer, taking on some risk, and sacrificing the benefit of having been paid one lump sum altogether.
  • Better Rate of Return - Sellers can charge as big of an interest rate as they wish on a seller carry back mortgage. This means that they may be able to get a better rate of return than most money market investments. After negotiations, a buyer and a seller may come to an interest rate that is appropriate for everyone.
  • Additional Stream of Income - A carry back mortgage provides the seller with additional monthly income since the buyer will have to make periodic payments to pay off the loan. Sellers who are not looking to make any big purchases from the house sale proceeds can benefit most from this.
  • Lower Capital Gains Taxes - If a homeowner sells their home outright, they will typically have to pay hefty capital gains taxes on the sale. However, with a seller carry back mortgage, sellers can defer some of their capital gains, resulting in a lower tax bracket.

Advantages for Buyers

  • Access to financing - Seller carry back mortgages provide financing to buyers with poor credit who can otherwise not qualify for a traditional mortgage. It provides the opportunity for this category of buyers to become homeowners.
  • Faster And Cheaper Closing - With a regular mortgage, a borrower would have to apply for the mortgage, wait for the approval, and go through the underwriting and closing procedures. With a carry back mortgage, the borrowers can skip some of the steps and close on the deal faster since fewer people are involved in it. Moreover, there are no bank fees for originating the loan or appraising the house.
  • Flexible Down Payment - In a seller-carry back mortgage, everything is negotiable, including the down payment the borrower has to make. Traditional mortgage lenders have minimums and requirements as far as down payments go.
  • Better Interest Rate for Some Buyers - Carry back mortgages are also attractive to buyers who own a number of properties. Banks and other lenders typically charge a significantly higher interest rate to borrowers who own multiple properties. Seller carry back mortgages may offer a better mortgage rate in this case.

Disadvantages of Seller Carry Back Mortgages

Disadvantages for Sellers

  • Possibility of Default - The biggest disadvantage of carry back mortgages for the seller is the possibility that the buyer may stop making mortgage payments and thus default on the loan. In this case, the seller will have to declare foreclosure and deal with the proceedings of taking back the house, which can take a lot of time and resources.
  • Loss of Equity - As in every house sale, the seller will have to incur some of the expenses related to the house sale. These expenses can include the real estate commission paid to the real estate agents and other seller closing costs. In a regular sale, the seller would be able to make up these costs by the proceedings of the sale. However, in a carry back mortgage, if the buyer defaults early on their loan and depending on the down payment made, the seller may experience a loss of equity.
  • Lack of Liquidity - The seller will not be able to use all the proceedings of the house sale as they typically would if they didn’t provide a carry back mortgage and sold the home outright. Therefore, their money will be tied up to the property for the length of the loan.

Disadvantages for Buyers

  • Higher interest rate - Borrowers of carry back mortgages will typically have to pay higher interest rates on these mortgages than they would if they were approved for a regular loan. Sellers charge higher rates since they are taking on the risk of the buyer defaulting on the loan, and are forgoing their chance to get one lump sum payment from the sale.
  • Possibility of Foreclosure - If the seller of the house has a mortgage on the house with a due-on-sale clause, then they would have to pay up all the mortgage if they want to sell the house. If for any reason, the seller cannot make this payment, the bank may foreclose on the house.
  • Possible Balloon Payments - A seller carry back mortgage may have a balloon payment that is due after 5 or 10 years. If the buyer cannot pay this balloon payment when it is due, they may risk losing the home.

Selling the note

If the seller wants a one-time payment instead of monthly payments by the buyer, they can choose to sell the note to an interested private investor. Private investors purchase carry back mortgages and when they do, they are the ones that collect the monthly payments from the buyer of the property. Typically, the seller sells the note on a discount to the investors. The size of the discount depends on several factors, such as:

  • Interest rate - A carry back mortgage with a higher interest rate is more profitable to the investor. This is why the discount on these mortgages offering high rates may be lower than a similar mortgage with lower interest rate.
  • Mortgage term - Investors typically prefer carry back mortgages with shorter terms. Therefore, mortgages with longer terms have higher discounts.
  • Prepayment penalties and late charges - Mortgages that include prepayment penalties and late charges are more attractive, which is why the discount rate offered is lower.
  • LTV ratio - A mortgage with a lower LTV ratio is less risky and more attractive to investors. Higher discounts are applied to mortgages with higher LTV ratios which are more risky.
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