Carryback financing is when a real estate agent provides the property financing to a buyer.
If a seller is agreeable to using a carryback note and a deed of trust, that note usually takes the form of a second mortgage. The financing for the buyer is then coming from the seller rather than a traditional bank lender.
The carryback financing method works great when the homeowner lacks adequate credit or a deposit that gives them the ability to take a mortgage loan.
One great example would be a homeowner who wants to purchase a home that costs $100,000 but only has $10,000 saved. They might only get approved for $80,000, which leaves a $10,000 difference. The seller can potentially financially assist the buyer in order to cover that final $10,000 and complete the sale. This is how carryback financing works.
How Does Carryback Financing Affect the Buyer and Seller?
In most cases, carryback financing is able to be done quietly between the buyer and seller in order to complete the sale of a property.
It is highly recommended that both the buyer and seller go through a lawyer and use a legal contract in order to sell and/or purchase a property using carryback financing.
There are bigger risks with this type of financing. Using a legal attorney and inking a deal that is legally binding can help protect both parties.
Keep in mind that any loan carries a risk of someone defaulting on what they owe. If the buyer defaults, this can have serious financial repercussions on the finances of the life of the seller. If you don’t have extra disposable income, it would not be recommended to take this risk with your finances.
When a buyer uses carryback financing, it’s rarely their first repayment priority, meaning if they run short of money then the loan may not be paid on time (or at all). Bank loans will always be paid back first.
Sellers Must Protect Themselves:
If sellers want to use carryback financing, they would be wise to check the credit of the buyer and their financial history as well. Covering your bases ensures that you are not leaving yourself vulnerable to losing finances and being put in a bad financial position.
The seller should act as though they are a large financial institution and protect their finances from buyers who will not be able to repay the loan they are given if they want to ensure financial protection.
Additional Information About Carryback Financing:
Carryback financing can take on any type of interest rate and terms of agreement that are agreed to by both the seller and the buyer. The unrestricted, open-ended nature of these loans makes them useful in certain situations. Many loans, however, will carry high interest rates in the 8 to 15% range to match the high risk that the seller is taking by loaning the buyer the money
This form of financing may be appealing to some sellers and has been appealing to them since it came out in the 1980s. The biggest draw to these types of financing is that they allow the buyer and seller to customize a loan that works for them.
For more information on carryback financing, please feel free to contact us for more information. We are always here and happy to help.