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.