Considering Holding an Owner Financed Second Mortgage? - Know the Risks and Rewards!
Executive summary about mortgage second By F. Rewey & Max Bellamy
More and more sellers are being asked to carry-back a second mortgage for the buyer - especially with the banks still keeping a pretty tight reign on lending. While seller financing can be a viable alternative to bank loans when it is the buyer's primary obligation or first lien, a second lien has considerably more risk. If you are asked to owner finance a small second behind the buyers bank loan weigh your options carefully and be sure to ask yourself these questions:
What if you lower the sale price?
Do you need the cash now?
What if the buyer does not make the payments?
Are you prepared to foreclose on the property?
Are you prepared to never get any of the money?
If you decide to carry back a second mortgage, make sure the buyers have good credit. Don't take anyone's word for it (that includes your Real Estate Agent). Ask to see a current credit report. You are carrying back the note (thereby extending the credit) and have the right to see the report.
Selling a second mortgage to a note investor is unlikely to make sense. Most second mortgages, if purchased at all, will be for 20-cents to 50-cents on the dollar.
Owner carry-back second mortgages can be a great way to facilitate a sale and even potentially pick up a good return in the process.
Second Mortgage Loans
A second mortgage is a loan that is subordinate to another loan taken against the same property. They are called subordinate in the sense that if the loan is defaulted, the first loan gets paid off first before the second one. The second mortgages are therefore riskier for the lender. Thus, second mortgage loans have a higher interest rate. There are different types of second mortgages. For example, if a property is valued for $75,000 and if the owner has availed a first mortgage for $50,000, it is easy to secure a second mortgage for $25,000.
A line-of-credit second mortgage is another type in which the borrower applies for a loan but does not avail himself of it immediately. Sometimes a second mortgage is taken at the same time the borrower secures the first mortgage. For example if the borrower wants to obtain a loan that demands a forty percent down payment and he has only thirty percent, he can apply for a mortgage for the required ten percent.
A second mortgage loan can also be applied for a value that is more than that of the borrower's property. But these types of loans are riskier for the financiers and demand greater credit. A second-mortgage loan is a good option if you need money urgently. Refinancing the first loan could also be a better option, but it depends on your case.
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