Foreclosing With A Carryback Loan: What Happens Next?

A carryback loan is one that is defined as a second loan or seller’s option loan. These loans help a seller sell a property such as a home and aid a borrower who may not otherwise be able to meet their obligations as with a 80/20 loan. The carryback is financed solely by the seller and presents a unique risk should the loan default.

In the case that a carryback loan goes into foreclosure, the seller stands second in line for repayment of the financing that they agreed to. For example a home with a $200,000 mortgage would require a minimum equity commitment of the buyer of 20 percent ($40,000). The seller may step in and finance the $40,000 as a carryback loan.

In a foreclosure, the $160,000 is paid off from any proceeds received through the sale of the property. Any remaining amount of money received will be used to make the seller whole.

Step 1: Surrender of the Home

In any foreclosure proceeding, regardless of the types of loans outstanding, the principal or primary lender takes possession of the property. This is done through a surrender of the title to the bank or lender and a transfer of the property. A sheriff deputy or other law enforcement official may be available to facilitate the foreclosure and make sure that individuals that formerly resided in the house have been served proper notice and have removed themselves from the property.

Step 2: Determine If Any Damage Has Been Done to the Home

Once the notice of foreclosure and eviction has been served and handled, the bank will inspect the home for any damages and repairs that may need to be made in order to put the house back on the market. None of these steps thus far involve in the seller of the home or holder of the carryback loan. Because the note holder is a second loan holder, their rights do not come into play until after the primary mortgage holder is made whole.

Step 3: Sell the Home

After the home has been repaired and readied for sale the mortgage holder will attempt to sell the home at a price large enough to at least recoup their losses. This may result in the carryback loan note holder receiving less than the amount they borrowed to secure the initial mortgage or nothing at all. Again this is the risk that the guarantor of a carryback loan faces when extending borrowing in order to sell the home.