Working with a Bank with Seller Finanacing

Buying & Selling Real Estate
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Working with a Bank with Seller Finanacing

Chad Ballard
Civil Engineer · Orange County, CA · Member since 2012 · 189 posts · 45 votes

I am a bit surprised that I am having trouble finding a bank (bank, local credit union, etc will all be referred to as the bank) that will finance a deal and was looking for some additional insight.

I have a productive rental (with mortgage) but it is making it a bit tough to find conventional financing for a primary residence (2 years tax returns required with rental). I recently moved out of the unit I am now renting and now I am looking for a primary residence to take advantage of the low rates for the long term (not an investment property).

The deal would look something like this:

Property Value: +/- $200k
Current Mortgage: $100k

Bank Financed @current rates: $150k - used to pay off current mortgage, $50k to the seller
Seller Carry Back @6.5%: $45k
My Down Payment: $5k

(This is a bit simplistic since I am not including any of the closing costs, repairs concessions, etc. in the post but I am sure you get the idea.)

I found a place and the seller is willing to carry back but I cannot seem to find a bank that will work with me. There are a few "maybes" and a lot of "I will have to check on that...nope sorry" and "it is not our policy to give loans like that" along with the brokers that won't give me a straight answer. (My guess is they are looking for other options with me to drive business which I don't blame them.)

I must be missing something is the way I am presenting the deal since the current mortgage will be paid off so there are no due on sale clauses to worry about it seems like a pretty low risk deal for the bank since the risk is transferred to the seller who would be in second position.

Anyone have a banks perspective on why they would NOT like to do a deal like this? I have talked to about 20 banks (have about 10 more on my list) now in the area with only one that is really considering it.

Thanks everyone.

Chad

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    I am not sure. I do know from talking with many VP's at banks for commercial loans that for residential or other types there are many banks with crud on the books.

    With regulators breathing down their necks the last thing they want to do is take an oddball loan to the bank committee to vote on. If that goes south they have told me they will be hung out to dry and lose their job among other things. The risk doesn't equal the reward.

    Many banks are slamming through only vanilla loans and getting all the other weird stuff off the books so the last thing they want to do is add more.

    Have you looked at newer banks open in just the last few years?? They do not have legacy loans and might be willing to do such a loan. You need to see if the banks you are talking too sell off the loan or keep it in house??

    If they keep it in house they might be more open to these arrangements. If they are selling the loans they originate right away then they do not want something oddball that they might have trouble moving on the open market.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    I can only speculate, but in general Seller notes behind an institutional loan is frowned upon in many cases. It sort of raises a flag that the Seller still has an interest in the property and there could be funny business, where buyer and seller are trying to manipulate the price or value, etc. Because of this only institutional subordinate financing is allowed. Additionally, in some loan product no subordinate financing is allowed, it depends on the loan product and underwriting guidelines.

    Have you simply tried to qualify for the loan without the seller carry back?

    At 5.0% down, you might be in the ballpark for an FHA loan and that rate will be less than your blended rate of the two loans. Or I would think you might be able to qualify for a Fannie Mae My Community loan product which has a higher LTV allowance. In any event, I suggest seek financing without the seller involved and see what you find.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    Maybe two things, 1) You say you're having problems qualifying, due to the rental property affecting your DTI ratios. Partial seller financing doesn't help this. Your new mtg payment, taxes, ins. go into your front end ratio, and the s2nd mtg pmt still counts in your back end ratio. 2) The chances for default are just greater with only 2.5% down. The risk isn't only that you default on the first, but if you default on the 2nd, there's still risk for the first

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    It's not a problem with a seller carring back a second, it's your down payment of only 5%, not enough skin! Seller financed deals with conventional are at best 10/10/80, 10/15/75 is better, meaning your down/seller's note/institutional financing. When you get to 15/10/75 or 15/15/70 you'll find it much easier.

    5% isn't enough in the deal and a small second doesn't mean the seller will likely pay off the first to protect the second. That's a no-go! :)

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  • Chad Ballard
    OP
    Civil Engineer · Orange County, CA · Member since 2012 · 189 posts · 45 votes
    13y

    Thanks for the insight.

    Joel Owens I have been focusing on smaller local banks and CU that would keep the loan in house. I didn't think about newer ones. Something oddball like this would not be able to get resold on the secondary market so I get why most lenders shy away but I think at least a few would look into it more.

    Dion DePaoli, Wayne Brooks and Bill Gulley Thanks for the perspective. I can go more down if needed so I might bump it up to 10%-15% when I actually get to the details but I have not even gotten that far talking specifics with the banks. I would also like to minimize the down to have some cash for some improvements.

    The Seller just wants out. They are losing money with it as a rental and are tired of messing with it.

    Thanks for your input everyone. If anyone has any other advise I would greatly appreciated it.

    Chad

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Might check with your attorney, being a non-owner occupied singlefamily you have the SAFE Act issues as well. Good luck...:)

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  • Chad Ballard
    OP
    Civil Engineer · Orange County, CA · Member since 2012 · 189 posts · 45 votes
    13y
    Originally posted by Bill Gulley:
    Might check with your attorney, being a non-owner occupied singlefamily you have the SAFE Act issues as well. Good luck...:)

    Would this be for the seller or for me? I would be owner occupying the property.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    The concept Bill is bringing up is the Seller originating a note to you the new owner/borrower in a property you will hold as a primary residence. The SAFE Act both federally and state level may have guidelines around such an event like the loan needs to be originated by a licensed MLO, etc.

    If your general inquiry conversation can not get past the part where you say seller subordinate financing, omit it and see what happens. If you have more money to put down, I really struggle with why you need or want to pursue seller financing.

    Good luck.

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  • Chad Ballard
    OP
    Civil Engineer · Orange County, CA · Member since 2012 · 189 posts · 45 votes
    13y
    Originally posted by Dion DePaoli:
    The concept Bill is bringing up is the Seller originating a note to you the new owner/borrower in a property you will hold as a primary residence. The SAFE Act both federally and state level may have guidelines around such an event like the loan needs to be originated by a licensed MLO, etc.

    If your general inquiry conversation can not get past the part where you say seller subordinate financing, omit it and see what happens. If you have more money to put down, I really struggle with why you need or want to pursue seller financing.

    Good luck.

    Thanks I feel so "safe" with the law looking out for me. I'm sure my lawyer will bring this up, if not I'll be looking for another, lol.

    I was hoping to keep a little cash available for improvements on the property but if the only way it to put more down to secure the deal them that will probably be what I will have to do.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    13y

    There are loans which you can get which allow for property rehab. Inquire with your lender.

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