WHAT IS SELLER CARRY BACK AND WHAT ARE THE DRAWBACKS OF IT?

Introduction To Seller Carry Back

In most real estate transactions, the buyers usually acquire finance through a mortgage lender to purchase the property. 

However, sometimes the borrower may not be able to qualify for a mortgage due to credit issues, low down payment, or low income. 

In such a case, there is one option where the buyer can finance through the seller. In this post, we will understand what a seller carry-back and how it benefits the seller and the buyer.

What Is A Seller Carry Back Loan?

In a seller’s carryback financing, the seller acts as a lender and provides funds to the buyer for the amount required to purchase the real estate property. 

This process functions very similarly to the process to get a traditional mortgage along with the promissory note the security instrument, and the deed of trust which is recorded with the county. 

Carry back financing is an extension of credit by the seller. In this, the seller carries a note for either a portion of or the entire amount of the property sales price. 

The reason why it is called carryback is that the seller carries the papers or where the owner carries the portion of the sales price and the buyer promises to pay the seller of that amount back over a specified period.

Why Would A Buyer Consider Seller Carry Back Financing?

When the buyer is not able to acquire a loan to get enough money to purchase the property, a carry-back loan could be the best option to complete the transaction. 

In this type of financing, the buyer experiences a faster closing time as there is no transfer of funds to the buyer as he would have to in the case of a traditional mortgage. 

If the buyer is unable to qualify for the loan due to low income or low credit score, a carry back loan could be a way forward. 

A buyer could benefit from a seller carry back financing when the money is tight and the financing guidelines are stringent.

Why Would A Seller Consider Seller Carry Back Financing?

The reason why a seller would consider a seller carry back is so that he or she can get an opportunity to earn a better return on the real estate investment compared to any other form of investment. 

In this type of financing, the seller can get a higher sales price for the property as the seller is providing the financing to the buyer and providing the opportunity for the buyer to purchase the home that the buyer was unable to acquire through the traditional methods.

 The buyer has to accept the higher sales price as the seller is offering the financing option to the buyer. 

Over a longer period, the seller pays less in taxes with the installment method and the seller could defer a portion of the capital gains that were financed as a part of the carry back.

In this type of financing, the seller acts as a bank that holds the note and collects payment from the buyer. If the buyer is unable to pay the installments, the seller has the right to foreclose the property and take the property back. 

Providing the seller carry back can attract more potential buyers especially in a buyer’s market or in a down market.

What Are The Drawbacks Of Seller Carry Back Financing?

Some carry back financing requires a balloon payment after a specific period and some might be shorter, the buyer has to be prepared to either pay that amount or refinance with another lender to pay off the carry back loan. 

If the buyer is unable to refinance before the maturity date of the carry back financing, the seller can legally foreclose the property. 

The new guidelines make it more difficult for a seller to provide carry back loans. 

According to the Dodd-Frank Act, any person who is offering or negotiating the terms of the mortgage for indirect or direct gain may have to obtain an origination license.

Conclusion

There may be certain exceptions applied to the carry back financing. Make sure that you check if you as a seller can provide the seller with carry back financing. 

As a buyer, speak to your real estate agent and other licensed professionals to get advice before getting into this type of financing so that you can make an informed decision.