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Seller Carry-back Mortgage Basics
Seller Carry-Back Mortgages
The first step in understanding a seller carry-back mortgage purchase is to understand the mortgage itself and how it came to be. Oftentimes when someone owns their home free and clear and put it on the market for sale they are approached by a buyer who wants to purchase it but who cannot secure enough bank financing to do so. In this case, it is fairly common for the potential buyer to ask the seller if they will carry-back a mortgage on the property for a specific period of time until other funding arrangements can be made.
A seller carry-back mortgage is a good deal for the seller because they can charge a much higher interest rate than a traditional bank or lender can, yet they still have security for the money in the property itself. For the privilege of borrowing the seller's private money, the buyer is asked to pay a higher interest rate, often twice the going mortgage rate at the time. The seller gains income each month as the buyer makes them payments and then at some agreed upon time in the future the buyer pays off the seller completely.
What if the Seller Needs Their Money Early?
As you know, what you plan for in the future, and what your future actually holds can be two very distinctively different things. You may agree to a seller carry-back mortgage of $100,000 today on your home with an end contract date 10 or 20 years from now. You relish the idea of the great interest rate you will be getting on your money, and you love those monthly payments which arrive in your mailbox each month. However, what happens if you become ill, or you have some other major life change which requires you to cash out that $100,000 investment? Then what do you do?
On any given day there are many people in this or similar situations. Think of people who have won the lottery or a large lawsuit payment which will take years to collect. The solution to the problem is to sell the seller carry-back mortgage to a third party. So, as a real estate investor, that is where you come in. You can actually purchase the mortgage, at a discount, and use your own private money lenders to fund the transaction.
Say for a moment that you find the mortgage above for $100,000 with 19 years remaining on it. The mortgage with the borrower is at 13%. You make an offer to purchase that mortgage for $70,000. At that point, you then line-up funding for the $70,000, at say 10%, from one of your private money lenders. At this point, you have $30,000 coming to you when the mortgage is paid off in 20 years. Additionally, you make 3% interest from each payment which is made to you!
While the above is a very simplified overview of the process of purchasing mortgages, you should be aware as a real estate investor that such things are very possible and profitable to do.