Sometimes referred to as “seller carry-back” mortgages, owner financed mortgage notes are created when the seller of a home or property decides to finance all or a portion of the property himself /herself and to “carry” a note from the purchaser. Such carry-back mortgages are often created as the result of the property being difficult to sell or when the purchaser has difficulty qualifying for traditional mortgage financing due to bad credit, too much additional debt, etc. Simply put, an owner financed mortgage note is simply a promissory note secured by a mortgage on real estate.
At any given time, it is estimated that there are billions of dollars of owner financed mortgage notes in existence. Owner financing has been utilized successfully for decades and is becoming more common as larger numbers of individuals have difficulty saving up for a down payment and/or qualifying for the purchase of a home.
Case Study: How a Note is Born
Jim has a house for sale which is priced at $350,000. It has an existing assumable mortgage from a local bank with a balance of $250,000. Being assumable, the existing mortgage can be taken over by a new buyer without taking out a new mortgage. A prospective buyer approaches James with an offer but explains that he has only a $25,000 cash down payment. With the existing mortgage being assumable, is prepared to offer Jim $275,000 for his home. He further explains that although he can easily afford a larger monthly payment, he had just moved to the area to take a new job and it was unlikely that a local bank would provide the additional $75,000 in financing so the $275,000 offer was as high as he could go.
Jim declines the low offer of $275,000 but offers the buyer a better solution. He says he will provide the additional $75,000 in financing himself by holding a second mortgage note. The note will be payable with an interest rate of 8% and will feature a 10 year fully amortized maturity. This means Jim will receive an income of $909.96 per month for holding the second mortgage. Additionally, with an 8% interest rate on the second mortgage and a payment of over $900 per month, the buyer will be motivated to refinance Jims’ private mortgage at his earliest possible convenience.
The buyer accepts Jim’s terms. He now will have the house he wants at a fair price. Jim is pleased because he sold his house for full price and has also created a high yield income stream with a very familiar collateral. An owner financed mortgage note is born.
Benefits of Owner Financing
Private owner financed mortgage notes can provide some significant benefits to both the property seller as well as the buyer. Such carry-back notes almost always require a substantially larger down payment than a traditional mortgage loan. In addition to the down payment, interest rates are usually well in excess of standard rates charged by most banks and home loan providers.
Why Provide Owner Financing?
- A potential buyer of a property is unable to secure more traditional financing so the deal can’t be done without private financing
- Both buyers and sellers of the real estate may want to save time and money on closing costs
- The seller perceives an investment opportunity as the holder of a first or second mortgage note
Benefits to the Buyer
- Provides an optional source of financing for buyers with marginal credit
- Offers fast turnaround time with streamlined documentation.
- Provides an attractive method of financing for raw land.
- Almost everyone qualifies.
Benefits to the Seller
- Most often provides an attractive down payment
- Standard interest rates charged are attractive as compared to interest available on Certificates of Deposit (CDs).
- If foreclosure is necessary, the property can be sold a second, third, or even fourth time.
Other Characteristics
Private owner financed mortgages often provide the only lending option available to non-qualifying buyers that may make an offer on a property based solely on its ability to be financed by the owner. This is especially true of real estate investors that are intent on selling properties quickly and do not want to deal with the problems and considerable paperwork associated with more conventional mortgage financing types. Owner financing saves time and money on closing expenses and for motivated real estate sellers, providing an accommodation to a buyer by offering private financing may entail some risk, however, the typical additional down payment and attractive interest rate of such paper can make the risk acceptable. In worst case scenarios, the seller will simply reacquire the property through foreclosure and be free to sell the property a second (third, fourth, fifth, etc. ) time.