Seller Carry Back Mortgage Explained – So you’ve just been offered a new job in Toronto, and you are excited to get your new life started. You list your house in Edmonton, but it just sits there for any of a number of reasons. Maybe you need to get the electrical system replaced, because the house is older; maybe the foundation is showing some issues; maybe the boiler leaked a few months ago, and you still haven’t gotten around to having all of the water damage repaired. In the meantime, you’ve moved on to Toronto, where you have an apartment, while your wife and kids are still in Alberta, waiting for that house to sell. You have found the new home you want, but you can’t get the approval for that perfect dwelling while that other mortgage is still influencing your debt to income ratio.
Seller carry back loans
Then, your realtor calls you to tell you that the young couple that toured the house last week is ready to make an offer. It fits within your window of what you are willing to take, and so you agree to it and head to closing. The only problem comes when the bank won’t approve their loan. The husband is a dentist who set up his own practice in Edmonton nine months ago, and he is bringing in money hand over fist. However, he still has some debt from dental school to pay off, and his income hasn’t been regular for long enough for the bank to give him a traditional loan. The agreed sale price is $400,000, and he has $100,000 in savings to put down. You’re upset at the bank and at the thought of your wife having to spend even more time across Canada from you, waiting for that house to sell.
Your realtor is sympathetic to your plight. After all, the difficulties with getting mortgages approved by traditional financing sources has become a major issue within the real estate industry. She suggests, “Have you thought about working with seller carryback financing?” You sit there, not quite sure what she’s talking about.
Seller Carry Back Financing Option
Think about it this way. Your sale price is $400,000, but you only have $150,000 left on your mortgage. While the lender might not approve the $300,000 that the buyer is requesting ($400,000 less the $100,000 down payment), it might approve $200,000, leaving you to be the lender for the other $200,000. Then, you would have $50,000 in cash ($200,000 less the $150,000 you still owe) and then a note for $200,000 — basically, a second mortgage — that the buyer would have to pay over time. The husband is a successful dentist in Edmonton and already built up $100,000 in savings in the first nine months that he owned his practice. This means the odds are pretty good that you’ll have the rest of your principal back with interest within two or three years. In the meantime, you get some monthly income in addition to that $50,000 check — which can help you make the down payment for that dream home in Toronto.
Benefits Seller Carryback Financing
The term “carry back” refers to the fact that you are carrying back that second mortgage to help bridge the gap in financing for the buyer. So what are the benefits for you? Yes, you get a monthly check in addition to that lump sum difference, so if you can live with not having all of your equity given to you up front, you can make some interest on the difference in the meantime. Also, you’ll get a higher interest rate than the banks will, because you are taking on risk that the banks won’t accept. It doesn’t mean you’ll bring in 20 percent or anything, but it won’t be that 3 or 4 percent you’re seeing banks charge in the financial sections for a 30-year fixed rate mortgage. Also, you get to move out of your house sooner, and your wife will be much happier with you, because she’ll be living with you in Toronto instead of making angry calls to you from the wilds of Alberta.
Are there some drawbacks? It’s possible that his dental practice could go into the toilet, leaving him unable to pay you in a timely fashion. However, there is risk inherent to all forms of investment. That risk is why you get to receive a higher interest rate than the banks will accept. Also, if you can’t wait for your money to come from the first house sale in order to afford the second one, this might not be for you. After all, the lender still has to approve that smaller first loan for the buyer, and if any problems pop up on that end, you can end up in a really bad situation at that closing in Toronto. Talk to one of the experts at Amansad Financial today to see if seller carryback financing is something for you to consider.