Thinking of Carrying Back a Mortgage For Your Buyers?
Presented as a public service by Joe Peters of Coldwell Banker
Helping buyers buy and finance a home can be a way for you to earn some interest on the loan, much greater than what you can find at your local bank or credit union. Plus, the note you issue is secured by the real estate so if your buyers begin to default, you can begin the process of foreclosing and recovering your asset. For instance, buyers come to you and ask if you’d be willing to carry the mortgage for them. You agree and charge say 6.00 or 7.00 percent. You can make an interest only note or a fully amortized one. It’s your call.
Before we get too far into this discussion, depending upon the location of the property and local rules and regulations, you’ll want to work with a local real estate attorney to properly execute the note while retaining your interest. Further, should you decide you want to get into real estate investing full time and finance multiple notes, at some point you’ll be considered a lender and must follow additional guidelines. In other words, know before you go.
So why would someone ask you to finance all or part of the purchase? Typically because they’ve applied for a traditional mortgage and couldn’t qualify. That said, if a bank turned them down why would you approve the very same application?
If you are considering carrying back a mortgage, you’ll want to review the buyers much as a traditional lender would. You certainly want to get a credit report (a report that you pull, not one provided by the buyers.) You won’t have access to the very same credit report a lender would see but it’s close enough to decide.
You’re looking for current credit accounts that shows activity. Look at the balance compared to the credit line. Lenders like to see balances be about one-third of credit limits. An occasional late payment on a credit account is not that big of a deal but multiple “late pays” can be an issue, especially if they’re recent. Late payments on a credit report only show payments made more than 30, 60, 90 days and beyond past the due date.
Ask for verification of employment and pay. Get copies of recent pay check stubs that cover a one-month period. If someone is self-employed, look at personal and business tax returns. Mortgage companies like to see the total mortgage payment, which includes property taxes and insurance, be around 33-38 percent of gross monthly income. If credit and income are in line, then you might have a good candidate.
But you need to ask why the potential buyers are asking in the first place. Why are they asking for a higher priced mortgage in the first place? Many times it’s because someone is newly self-employed. Traditional mortgage guidelines ask there be at least two years of self-employment verified by filed federal income tax returns. For example, an individual has been working as a plumber for 10 years and decides to go out on his own but has only been self-employed for a few months. A bank might have a problem with that but if the guy has clients, bank statements show some cash flow from the business and everything else is in order, that might be a good candidate.
Remember, carrying back any mortgage, be it a first or second lien, is completely up to you. People find out they can carry a mortgage for their buyers and get better returns than they can get at their bank, plus the loan is secured by the asset.
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