What Is a Carryback Loan?

A carryback loan is extended from a seller to a buyer in order to help a sale take place. A typical carryback loan occurs when the borrower cannot qualify for the financing needed to purchase a property due to extenuating circumstances. For example, it may occur when the property itself is not eligible for conventional financing. This loan may also be an option when the borrower is excluded from traditional borrowing opportunities due to his or her financial status.

Benefits

Carryback loans are typically offered with a very low down payment. In fact, the seller will usually pay all the closing costs on the loan. Further, carryback financing can occur very quickly, making the sale process faster than with traditional financing options.

Risks

The main risk of a carryback loan is incurred by the seller. The seller will be assuming a large amount of the financing cost. In return, the seller will charge the buyer/borrower a high premium for the service. Additionally, since the borrower is not going to the traditional lending market, the borrower leaves behind many of the protections guaranteed in that market. This means that the borrower may face challenges when trying to refinance, repay or otherwise close the loan in the future.