Many people looking to buy their first home think their options for purchasing a home are limited to getting a traditional mortgage or paying cash for the home. A traditional mortgage typically will require a 20% down payment on the home. With good credit, there are options for as low as 3.5% down payment through a Federal Housing Administration (FHA) loan and some private lenders. A third option for purchasing a home is “seller carryback financing.” Most sellers will probably prefer an outright sale of the home versus being paid back over time, but there can be advantages to carryback financing for the seller as well. Here’s what you want to understand about seller carryback financing during the COVID-19 pandemic and whether it is still an option to consider during the current housing market.
Understanding Seller Carryback Financing in Arizona
Seller carryback financing, also known as owner financing, is when the property owner becomes the mortgage holder to the new buyer. If the seller owns the home free and clear of any mortgages and liens, they can opt to offer seller carryback financing as an alternative path for buyers to finance the purchase of the home. In fact, in some instances, homeowners will maintain multiple mortgages, allowing for the buyer to be the mortgagee of the second mortgage.
With seller carryback financing, the seller and buyer can negotiate on the down payment, interest rate for carrying the mortgage note, and the payment terms. The buyer will be making payments to the seller until the agreement is completed or they restructure their mortgage through another lender.
When is Seller Carryback Financing a Good Option
The flexibility of seller carryback financing can be an attractive option for both buyers and sellers. Typically, a buyer would look to pursue seller carryback financing if they had poor credit and were taking active steps to improve their credit.
If you are considering seller carryback financing because of poor credit, please note that it’s not uncommon to restructure the mortgage through a traditional lender or FHA loan when your credit score improves. As a buyer, you would want to maintain the option to pay off your mortgage early without penalty if you are considering a contract for owner financing.
A property seller in Arizona might want to provide a buyer with seller carryback financing for a few reasons. In some instances, deferring total payment on the property over the course of many years can be a huge tax advantage for sellers. Further, sellers might simply want to treat the sale of the home more like a series of long-term dividend payments rather than a large one-time payment. Sellers might also view seller carryback financing as an avenue to attract more buyers when markets are slower.
While there are risks, which will be touched on more below, seller carryback financing can help stop buyers and sellers from regretting their choices to buy and sell homes. Seller carryback financing can help you prepare for the future and also help buyers and sellers create a stable budget of cash flow. The arrangement also has the potential to be more flexible than loans from traditional lenders. While we encourage you to do your due diligence when it comes to purchasing or selling a home, please note that seller carryback financing is potentially the right tool for you that many buyers and sellers are not aware of.
Risks of Owner Financing in Arizona
When the owner of a property decides to become the financing source for the buyer, there are inherent risks, including how the Seller plans on enforcing the agreement. First and foremost, the buyer could fall behind on payments or stops making their payments all together.
There’s also the risk of time and additional resources being required to get the buyer current on payments or foreclose on the home. The foreclosure process in Arizona is not easy. We posted a previous article on Arizona foreclosure laws and processes. Unless you are extremely familiar with the foreclosure process as a mortgage holder in Arizona, you would need to hire an experienced real estate attorney to guide you through it.
The buyer does not likely have such enforcement risks when opting for seller carryback financing in Arizona, but they will likely pay higher interest rates and a higher total price for the property. With low interest rates and increasing home prices in Arizona, most sellers will require some additional incentive to agree to owner financing. This will likely include a down payment and attractive interest rates and terms for the seller. These terms will likely include the strictest language possible around payment defaults and foreclosure.
Importance of a Real Estate Attorney for Seller Carryback Financing
The option of seller carryback financing can be a win-win for both parties with a solid agreement. Understand, however, that this process can be tricky. From drafting a good potential agreement to understanding foreclosure law in Arizona, it would behoove buyers and sellers to hire a real estate attorney who knows how to draft a stellar agreement and understands foreclosure law in Arizona.
The attorneys at MacQueen & Gottlieb are experienced with seller carryback financing and the details of all the appropriate agreements to complete the process. Contact M&G today at 602-533-2840 to schedule an initial consultation or make an appointment online here.