Rates are flat today. Today’s comparison mortgage rates with no lender fees are 4.0% on a 30 year, 3.375% on a 15 year and 2.875% on a 5/1 ARM. (click here for details)
Today we are going to talk about another topic that is not very well known. It is the elusive seller second mortgage. You heard me! The seller of a property can hold a second mortgage on their property you are buying. Now this is not going to be for everyone but it could be a great option for some of you.
Check it out in today’s video:
Now of course the seller needs to be in a good enough equity position to be able to offer this. So at closing any lien holders on the property will need to be satisfied like normal. Then the equity that is left over is available for a seller second mortgage. Of course there are some restrictions to this as well so let’s take a look at what those are.
1. The loan must be at current market rates of interest. So the seller can’t charge you 20% interest for the loan.
2. The loan cannot balloon in the first five years. A balloon payment means it would have to be paid in full or refinanced. That’s not an option until after the 5 years is up.
3. The loan cannot be a negative amortization loan. It must have a principal reduction with every payment.
4. The loan must be legitimate and not forgivable. So basically the seller can’t increase the purchase price by 20% just to create equity to then loan that imaginary equity to the borrower. This is a good rule but there is also something that would prevent this from happening anyway. It’s called an appraisal. There is just no way that is happening in today’s market.
5. No prepayment penalties or restrictions.
6. The buyer must qualify for the 1st and 2nd mortgage payments in their DTI.
That is it. If the seller has a lot of equity and follows those rules you could potentially buy a home with 5% of your own money down and still have no PMI. Not a bad deal!
Like I said, it’s not for everyone but it is an option that you should be aware of. If you are a seller that is lucky enough to be in a great equity position and wouldn’t mind some cash flow instead of a lump sum payment you should consider this option and talk with your realtor about advertising that option after you discuss the risks with you real estate attorney.
Seller seconds were considered a big no-no in the past due to basically loan fraud and imaginary equity. But it is still possible today if you follow the rules. I hope that help some of you out there.
Let’s change the way people shop for a mortgage…forever!
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