About Carryback Financing
Carryback Financing is a type of mortgage where the seller, as long as he or she owns their property free and clear, can effectively provide financing to the seller directly. This is done by the seller carrying the note for a specified amount of the purchase price. The amount can be anywhere from ten percent to one-hundred percent of the purchase price.
Benefits of Carryback Financing
Carryback financing is an excellent option for people who have blemished credit, difficulties obtaining financing from a traditional source, and may be of limited financial means. This type of financing allows the seller to effectively get a buyer into the home, and the buyer to own a home even when their credit history is less than perfect.
Additionally, because carrybacks offer more flexibility than traditional loans, the arrangement can be crafted to suit both parties in the deal. The amount of interest a seller can charge is less than what a traditional lending institution would charge. Also, a carryback loan on average lasts five to seven years. This is the perfect amount of time for the buyer to reestablish his or her credit and eliminate negative reporting. When this time period comes to an end, the buyer is then able to obtain traditional financing from a reputable lender. Of course, as with any loan, there will be associated closing costs and other fees upon obtaining new financing.
Because the type of buyer who traditionally seek carryback financing are people with credit history issues, this creates great risks for the seller in the event the buyer were to default. The seller would be stuck with the whole mortgage, if there is still a mortgage on the property. And the task of evicting the buyer.
The buyer is not without risks either. The seller could default on their mortgage on the home. If payments are owed on the property and the seller defaults, the seller could lose the property and the buyer would then lose the sum of the amount they invested in the property up until that date of default.
Pitfalls of Real Estate Carrybacks
In real estate transactions, it is not uncommon for a buyer to ask the seller to finance a portion of the purchase price via a promissory note secured by a second deed of trust against the property.
Where the property is residential real estate of two and one-half acres or less—a normal residential sale—special rules apply and the seller will have no right to sue to collect money due in the event of a default.
Under Arizona law, the seller’s sole remedy is to foreclose upon the property. The foreclosure process can be lengthy and, in the meantime, the seller must protect his interest by keeping prior encumbrances current. In effect, this amounts to giving the defaulting buyer free rent during the foreclosure process.
A seller can be in a very difficult spot where there is insufficient equity in the home or where the seller’s funds are insufficient to keep the prior encumbrances current. Each case must be analyzed on its merits, but where a seller can foresee no circumstances in which he or she would retake possession of the home, it may be a better practice to secure the carryback note with other property, if available, or to not secure it at all, thereby preserving the option to sue for collection in the event of a default.
Consult With An Attorney About Carryback Financing
In order to draft a solid carryback financing agreement, it is essential to consult with a real estate attorney to protect both parties involved. There are many intricacies associated with this type of financing and hiring a lawyer to, at a minimum, review the documents and arrangement is the only way to ensure a successful agreement.