‘Owner Will Carry’ refers to a real estate financing option where sellers act as a lender for all or part of the mortgage loan. This strategy has been used by real estate investors for several years, but is now becoming a popular way for buyers with bad credit and those unable to meet down payment requirements to buy a house.
Owner will carry is often referred to as seller carry back mortgages or seller financed. Most sellers only finance part of the loan and require borrowers to obtain bank financing for the balance. Mortgage lenders are the first lienholder, while sellers are the second. This can place sellers at risk if buyers default on the bank-financed loan.
Sellers typically require a down payment and carry financing for 2 to 5 years. However, financing arrangements can be established to suit the needs of all parties involved. The primary purpose of owner will carry is to provide buyers with the opportunity to improve credit scores to qualify for bank financing.
Many sellers have begun offering seller carry back mortgages to entice buyers who cannot qualify for a home mortgage loan. After the banking crisis and subprime lending fiasco, banks tightened lending criteria. Today, borrowers must possess good credit and a solid work history to buy a house.
Skyrocketing unemployment rates have left many people who want to buy houses unable to qualify for a bank loan. To make matters worse, banks are holding millions of foreclosure properties which are being sold at discounted rates. Add in declining property values and it is easy to see why sellers are looking at creative financing options to attract buyers who normally wouldn’t qualify.
Owner will carry can be beneficial to both buyers and sellers, as long as proper protocol is followed. Both parties should engage in due diligence to ensure they are working with a reputable person. Buyers should conduct property record searches to make certain the house is not in foreclosure and obtain home inspections and real estate appraisals.
Sellers should conduct background and credit checks to ensure buyers are financially capable of remitting payments. Regardless of whether the seller is carrying the full or partial amount of the loan, a seller carry back contract should be executed by a real estate attorney.
Owner will carry financing should be secured with a promissory note which includes the purchase price, down payment, interest rate, monthly payment amount, and contract expiration date.
Buyers with bad credit must engage in credit repair strategies to remove derogatory credit and improve credit scores. In order to obtain the lowest interest rate, borrowers will need to have a FICO score of 720 or higher. Once the owner will carry contract expires, buyers must be prepared to refinance mortgages through a conventional lender.
Private sellers generally do not report loan payments to credit bureaus. Therefore, it is important for buyers to submit payments via personal check in order to provide a payment history to mortgage lenders.
As with any real estate transaction, careful consideration should be given prior to entering into financial contracts. For most people, buying real estate is one of the largest financial transactions they will make. It is crucial for buyers and sellers to understand how owner will carry financing works and execute legal documents to limit risks and potential problems.