Selling Your Home: Taking Back a Second Mortgage

When selling your home, there is a chance that you might consider the possibility of taking back a second mortgage on the property. Offering partial seller financing can be beneficial in some scenarios but it can cause problems as well. Here are a few things to consider about taking back a second mortgage.

Taking Back a Second Mortgage

With this process, you are going to essentially loan part of the purchase price of a home to the buyer. They are going to secure a primary mortgage to pay for the majority of the home purchase. Then, for a small percentage of the house, you are going to lend them the money that they need. This means that they are going to make a primary mortgage payment to a traditional lender and then make a smaller monthly mortgage payment to you.

Higher Prices

One of the benefits that you can receive by utilizing this strategy is a higher sales price. In most cases, this is done in order to allow someone that could not otherwise afford it to purchase your house. Because of this, the buyer will usually allow you to increase the amount of money that you charge for the house overall. In the long run, this can benefit you because it allows you to get more out of your house.

Interest

This type of investment can also be beneficial to you because you will be able to collect interest on the monthly mortgage payments. In most cases, you will also be able to charge a higher interest rate than the going market rate. Second mortgages traditionally have higher interest rates and buyers are usually aware of the higher rates. This means that you can increase the amount of profit that you bring in from the transaction even more.

Complete the Deal

This type of transaction is utilized by many individuals in order to sell a property that they have otherwise been unable to move. By utilizing a second mortgage, you can increase the amount of people that will be able to qualify for your property. This will essentially eliminate the need for a down payment and will open the doors to many more buyers.

No Diversification

One of the potential problems with this type of transaction is that you will not have any diversification on your side. Traditional lenders write many different mortgages in order to diversify their portfolios. This way, they can limit the risk to an acceptable level. Even if one borrower defaults on their mortgage, it will not drastically affect the rest of their mortgage portfolio. When you are working on your own, even if you reduce the risk to an acceptable level for a traditional lender, there is a chance that the borrower can default. 

Inexperience

Another problem with this type of transaction is that most homeowners are inexperienced with this type of sale. If the buyer stops making payments, you may not know what to do next. This could lead to you losing a significant portion of the profits from the deal because you will need to hire an attorney to properly collect your money and late fees.