Seller held mortgages or trust deeds (as they are called in some states), are probably the first thing people think of when you say the words “seller financing”. In reality, this is not one of the most popular ways to finance the purchase of a house. The main reason is that most sellers don’t own their homes free-and-clear, and those that do aren’t always willing to take their money in monthly installments. Nevertheless, some investors and homebuyers are still able to get seller financing done on a few deals here and there.
What is popular, is a seller held “second mortgage”. Sometimes, a buyer may not be able to qualify for enough financing from a bank to purchase a seller’s property. To get the property sold, the seller can take back a portion of the sales price in the form of a second mortgage. This can be very helpful when purchasing a property yourself, and is commonly done by investors who are retailing a property to a homebuyer who doesn’t have enough money to put down or is hard to get financed.
Second mortgages can also come into play when the seller is willing to deed you the property “subject to” (as we discussed a minute ago), yet they still want to get paid for some of their equity.
A Wrap Around Mortgage
Another type of seller held mortgage is a “wrap around mortgage” or “all inclusive trust deed”. These are used when a seller owes money on an existing first mortgage or trust deed. Rather than the buyer assuming the seller’s existing loan, the seller makes out a new loan to the buyer. The buyer then makes the payment to the seller on the wrap around mortgage, and the seller makes the payment on their loan to the bank.
The main problem with wrap around mortgages is that they almost always violate the due-on-sale clause in the seller’s underlying financing. As a buyer, you also have to worry about the seller collecting your payment and then not making their payment on the first mortgage.
Advantages Of A Seller Held Mortgage
There are some obvious advantages when you can get a seller to hold back a mortgage.
Little Or No Money Required
First, many truly motivated sellers will not look for very much money down, if any. If the seller does want a lot of money down, then you’re not dealing with the right type of seller and need to move on.
No Credit Required
You also don’t need any credit to qualify for a seller held mortgage, unless the seller specifically ask to see your credit report. Even then, the seller is not scrutinizing you like a bank would.
Seller Financing Does Not Show On Your Credit
One advantage that can help you down the road is that seller held mortgages don’t show on your credit report. This can be helpful when trying to get bank financing to buy other properties because your credit report does not show as much debt.
Disadvantages Of A Seller Held Mortgage
Trying to do deals by only getting a seller held mortgage, does have some disadvantages.
Finding Motivated Sellers Who Own Free And Clear
Probably the biggest disadvantage to buying properties using only a seller held mortgage, is that you must find properties in which the seller owns it free-and-clear of any loans or liens, and who is willing to collect their money in monthly installments. This is not impossible as roughly 30% of homes in the US are owned free and clear.
Wrap Around Mortgages Violate The Due-On-Sale Clause
Also, as we said a minute ago, if the seller doesn’t own their property free and clear, a wrap around will violate the due-on-sale clause on the underlying first lien. This is due to the fact that title to the property has transferred without the underlying loan getting paid off or assumed.
You can however, do a seller held second mortgage when getting a new first mortgage because you would be formally qualifying for the new loan. Or, you could qualify to assume the seller’s loan and have the seller take back a second mortgage. Either of these scenarios would solve the due-on-sale clause problem. However, as you’ll learn in this course, you don’t need to qualify for loans or put your personal credit at risk to be able to invest in real estate.
Another disadvantage with a seller held mortgage is that you’ll have to pay some closing costs, because the title is transferred and a new mortgage or trust deed to the seller has to be recorded. There are also other attorney’s fees and closing costs, if you want to make sure everything is done right.
If the seller isn’t getting any money down, they may not want to come to closing with cash for their side of the closing costs. Therefore, you may even end up having to pay all of the costs just to get the seller to do the deal.
Seller Will Have To Foreclose
Finally, because this is seller financing in which the seller’s interest is secured by either a mortgage or trust deed, the seller will have to foreclose in the event the buyer defaults on their payments; because of this, you should never sell your property using a seller held mortgage or trust deed. There are other seller financing options you can use when selling your own properties that afford you more control and we’ll cover them in more detail later.