One of the things that investors can do to help qualify buyers for
their homes is to be open to the idea of carrying a second mortgage on
the home when they sell it.

Many mortgage companies have restrictions on "seller carrybacks" as
they are commonly called. In some cases they want the buyer to put up a
portion of their downpayment and will allow the seller to carry back a
note for the rest. In other cases they will make sure the carry back is
a larger percentage of the cost of the home such as twenty percent.

They do these things to protect themselves. For example, Betty wants to
buy a house from 123 Real Estate Investments. Betty has bad credit and
can only qualify for an 80 percent loan to value purchase loan (in
mortgage world this is often referred to as LTV).

The mortgage lender knows that lending to Betty is risky. Let's face
it, bad credit is usually caused by lack of paying bills or paying
bills late. The mortgage company knows that they may be one of the next
people calling Betty looking for their money every month and they want
to make sure that if they have to foreclose on this home they can get
their money back.

At 80 percent LTV they are much more likely to be able to do that. I
have found that it is getting more and more unusual for a lender to do
carry-backs of less than 20 percent but some are still doing them.
Also, you should check with the lender because many have seasoning
requirements for this type of deal- in other words you have to have
owned the property for a certain length of time before they will
consider it.

So they ask the seller to risk the other 20 percent (or 10 percent or
whatever the case may be).

As the seller, you really are taking a risk. You are in the second lien
position which means if the house is foreclosed on by the lender you
will most likely not get paid because of those ahead of you in line to
get paid.

If Betty pays you and not the bank she knows she will lose her home so
she is more likely to pay the bank and never get around to paying you.
The only real recourse you have to get your money if Betty decides not
to pay is to foreclose. Please note what I have said above though. It
is usually a waste of time and money to do so because you only get paid
after those in front of you and most of the time there is very little
left for you.

Now that I have told you the possible negatives, I have to point out
the positives too.

Let's say that Betty always had good credit until a couple years ago
when she got sick and suddenly found herself off work and unable to pay
her bills. She's better now and is back at work and trying to rebuild
her credit. This would make Betty a better candidate for the seller
carryback because she had a temporary credit crisis, not lifelong bad
credit (more on that topic in my next posting).

Also, if Betty "forgets" to pay you back, she will suddenly remember
you when it comes time for her to refinance her home. Guess who usually
has to be paid off before that can happen? You! I have often gotten
calls from title companies looking to close a refinance wanting me to
sign off on the deal. They will usually try to negotiate the amount
owed down and you can decide if it works for you. I personally will try
to give breaks at this point so that I can get at least a portion of my
money back. Whether you negotiate or not is up to you as the investor.

People ask why investors take risks such as this, and there are a
number of reasons.

Seller carrybacks can help you move property in a tough market or a
tough location. Maybe the no money down great credit buyer would pass
on your home in favor of a brand new home, more desirable location,
bigger yard, etc.

Betty can't just make an offer to anyone and ask them to carry twenty
percent of her financing. Most sellers would reject such an offer. The
investor, however, knows that they can offer a win-win for both parties
this way- they move their property, freeing up resources to buy the
next one, and Betty gets a chance at a fresh start.

Another reason we have to be open to this is that some of us live in
bad credit zones. I live in a steel town in the Midwest. Most of the
people who live in my town have bad credit. The average scores I see
are in the mid-500's. In manufacturing areas house values grow slowly,
leaving little cushion for people to borrow against their house
sensibly when they hit tough financial times. They are also laid off
frequently and have incomes that fluctuate widely based on the
availability of overtime. They are also much more likely to be injured
at work and lose income that way than office workers. This all spells
more credit problems. By working with lenders who allow seller
carrybacks, investors in such areas can sell more homes. This is good
for your community, good for your buyer, and good for the bank. Just
make sure you can afford to try it and that it will be good for you
too.

More info on your stop foreclosure information search:

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