Carryback Loans: Benefits and Positives

Carry back loans can get you in a new home even if you might not qualify for a traditional loan. If the seller is willing to offer a carry back loan, consider the following items to decide if it's right for you.

How Carry back Loans Work

Let's take an example of a $200,000 home you would like to buy, but you only qualify for a $180,000 loan. You have $10,000 for a down payment, but that leaves $10,000 unfunded. (This doesn't mean you have bad credit. There are any number of reasons a lender will only lend a given amount on a home.)

If the seller doesn't want to come down from their specified sales price, you can be offered a carry back loan.  The seller will sell you the house and will "carry back" some of the cost in the form of a note.  You will make your payments to both the lender and the seller and the seller will get the house sold with an new income stream (your payment). 

Up or Down Economy

If the housing market is strong with rising housing prices, carry back loans are available because they can help a seller sell at their allocated sales price.  Conventional financing can sometimes fall short and carry back financing can bridge this gap.  Sometimes, in a good economy, you can even get a second traditional loan for the down payment, with the carry back loan taking third place. That means, however, the seller is the last person to get any money if the loan defaults and the house must be sold. But that is a seller risk, not a borrowers risk.

In contrast, if the housing market is weak, sellers are more motivated, and even apt to offer carry back loans.  The loans expands the price range of homes available for purchase.  However, keep in mind that Carry back loans must be reported to the primary lender and could affect your ability to secure a first mortgage because many lenders have loan to value restrictions. 

Non-Conforming Property

Often, a lender will deny a loan or offer less than stipulated sales price because it is "non-conforming."   Non-conforming simply means the loan is not typical.  Non-conforming loans can also be provided for properties with bad physical condition.  For example, the home can be located in a location the lender believes won't hold value. Or it could simply mean the lender believes it is priced too high.

There are many instances when non-conforming home financing makes financial sense. You may be able to fix up a dilapidated home yourself and add value or you may know that a home in a marginal neighbor represents good value. Additionally, you may believe a home's price will increase in a good market. In any examples, carry back loans allow you to get into a home that traditional financing cannot make available to you.

Help With Bad Credit

Carry back loans are particularly helpful if bad credit has left you unable to qualify for a conventional loan at the full amount needed because lenders require a higher down payment amount when you have had credit problems. With a carry back loan, you will need a sufficient amount of income to cover both loans, but, if a bad credit score is keeping the lender from approving your loan, a motivated seller can fill the gap.