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Home seller can opt to carry buyer’s loan

Q: I’m wondering if you’re seeing more sellers out there who are willing to carry a note to help buyers purchase their home. And do you have any suggestions on how to go about this?

— Bill D., Las Vegas

A: I think you’ve touched on a bit of a trend. At least in my experience, I’m seeing more home sellers willing to consider offering such terms to buyers who can afford to make a sizable down payment but have trouble securing a mortgage loan.

When people use terms like “carry the note,” they usually mean that the seller remains the mortgage holder while the home buyer pays the seller, not a lender, each month. The seller is the mortgagee. While these transactions still account for a small percentage of all local housing sales, I think these arrangements are becoming more common, mostly due to today’s tighter lending standards and appraisals that some sellers see as undervaluing their property. I think such deals make sense when they can benefit both parties.

For sellers, especially those with considerable equity in their property, this can be a good way to get their investment back, plus interest. They also don’t have to worry about appraisals that may come in below their asking price.

The seller benefits from getting a good price for their home and from collecting the interest on the note. So, they are actually making more money on the sale of their home than they would have in a traditional transaction.

For buyers, especially those with credit issues, it can be a good path to homeownership. Such arrangements can be an attractive solution for buyers who have difficulty getting a mortgage, even though they have the cash for a down payment and the monthly income needed to buy a home.

This is also a way for home buyers to take advantage of our undervalued home prices. Buyers who have rebounded financially and built up their savings are able to find a home at a fraction of what they would have paid a few years ago.

Many sellers in such deals have actually paid off their mortgage and own the home outright. They will often require a substantial down payment, say more than 10 percent of the value of a higher priced home or more than 30 percent on more affordable homes, say those priced in the low $100,000s.

Once the buyer can show the down payment and income, they typically pay sellers through a collection agency or other qualified third party. If the buyer defaults, the agency is empowered to begin foreclosure proceedings that would eventually return the property to the seller.

Many arrangements are based on a shorter term than a traditional 30-year mortgage. I’ve seen some based on a five-year agreement. After paying the seller for those five years, the buyer can then seek a traditional mortgage from a lender to pay off the balance.

Here are some things to keep in mind:

• All payments should go through a licensed and bonded collection agency.

• Buyers can offer to pay a mortgage amortized over 30 years, then refinance three to seven years later.

• Most sellers who “carry back” a mortgage will typically demand a slightly higher price for their property, as compensation for what they perceive to be additional time and financial risk.

• Buyers in such an arrangement will still have to prove through pay stubs, tax records, credit reports and other sources that they have the ability to pay the monthly payments.

• The buyer and seller may want to seek independent legal counsel to understand their rights and obligations.

• Incidentally, this approach is even more common over the years and lately in vacant land sales, where there is very little lending taking place.

Paul Bell is the president of the GLVAR and has worked in the real estate industry for 30 years. GLVAR has nearly 11,500 members. To ask him a question, email him at ask@glvar.org. For more information, visit www.lasvegasrealtor.com.

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