There are many scenarios in which this type of financing will benefit all parties involved.
The seller is able to sell his/her house, and can earn interest while you repay the loan. Typically, “seller seconds” are short-term loans, often lasting from three to five years at which time the loan becomes due, although it is up to you, the seller and your lender what the exact terms of the loan will be.
Recommended Refinance Lenders:
Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.
The buyer is able to purchase the home, and can usually negotiate a fixed interest rate that is well below market rates on second mortgages. This type of financing is an extremely important tool to utilize in creative financing. This is also beneficial to the mortgage broker and real estate agents (if they are involved), because they are able to close the deal.
Down Payment for Subprime Loans
Most often, borrowers with very good credit and a stable job history can finance the total purchase price of their home through a variety of ways. If you’re in the subprime lending market however, 100% financing is becoming increasingly difficult to obtain. Recently, many subprime lenders have been tightening their guidelines for loans to borrowers with adverse credit. So, you may have been able to obtain 100% financing this past December with a credit score of 582, for example, but now the lender is only willing to finance 95% of the purchase price of the home. That 5% can be a deal breaker if you don’t have the extra cash to use as a down payment.
Loan to Value Ratio
It is very important to make sure that your broker or lender double-checks their guidelines on seller financing. In the previous example, 95% is the LTV (Loan-to-Value) ratio. The lender will also have rules about the CLTV(Combined Loan-to-Value) ratio. The CLTV is always equal to or greater than the LTV. As with the LTV, the higher the CLTV, the greater the risk. That is why some lenders will limit the total amount of financing in any purchase; if you default on your loans, there is almost no equity in the home and the bank probably will not recoup the foreclosure costs. Also, the lender will ask to see the terms of any secondary seller financing to make sure you can afford the additional monthly payments, which they will take into consideration when determining your debt ratio. Your broker or title agent should be able to draft the terms of the “seller second” for you.