Holding Mortgage is Risky for the Seller

In today's market, most sellers have plenty of equity, which allows them to consider holding a portion of the buyer's mortgage. This is frequently referred to as a "seller carry back." The belief is, that these loans can yield an attractive rate of return for the seller. I don't consider them to be very good investments unless a seller can obtain a higher price on the sale. Although the rate may be high, second mortgages are riskier than first mortgages. Borrowers who get into trouble sometimes stop paying on the second while gambling that the holder of the second won't do anything about it. Forcing a foreclosure is costly and won't guarantee recovery of the second loan. Another problem is that mortgages must be serviced and few sellers are equipped to do it effectively. A higher price might overcome these negative factors. For example, if the seller can raise the price from $700,000 to $720,000 by providing a 9% second for $35,000, the ratio is 57% which is a great investment if the buyer repays. If not, the seller stands to lose up to $15,000. As a rule of thumb, I would not even consider a carry back unless the borrower's FICO was 750 or more. If the buyer puts more money down, I might consider a little lower score.