Can a seller credit me for down payment?

Question

Hello!  Quick questions as I'm thinking about a deal here in Wisconsin.  A duplex in a great location that needs some work.  I do not want to house hack the duplex, therefore, I would put 20% down.  If I were to close on the property and provide my own 20% for the down payment, has anyone heard of a situation where the seller credits back that 20% and finances it over a term?  I am not sure if is allowed or something that's already common.  Would love to hear what you guys think.  Thank you!

Russell Brazil · Answer

Not allowed with conventional financing

Wyatt Seidel · Answer

Great question Garrett! Unfortunately, this is not legal. If the seller has agreed to do creative financing from the get-go and do some sort of seller financing agreement, this could be a possibility. But if you plan on getting a conventional loan, this would constitute as mortgage fraud. Best of luck!

Scott Crowley · Answer

@Scott Po Technically, there is no specific threshold for what amount of equity the owner needs in the property to propose the deal. However, the reason I stated as such is as follows:

1) When the current owner holds title free and clear, it removes all other lien holder variables out of the equation entirely, reducing risk. Which leads to the biggest point point of mention regarding my comments for a strong equity position...

2) If you strike up a seller-finance deal when they have a lien on the property, it brings that lienholders terms into the risk variable of the deal. Meaning, if you are buying from a homeowner or investor that has conventional financing on the property, the due-on-sale clause could be forced at any time. I personally don't lose sleep about the due-on-sale with title transfers to an LLC owned by the same individual for asset protection, but I do take a step back when it comes to transfer of title to a completely new owner with a new set of payment terms, that compound with the original from the sellers lender, which is expecting their monthly payments still. Outside of the due-on-sale, if those payments stop being made, the seller can be foreclosed on and you're both out of a property.

If the seller has a strong equity position in the property(whether that be 50%, 70%, etc.), then it lowers the debt payoff(ideally increasing the feasibility it could be paid) in the rare, but possible scenario their lender calls the note due. Another reason would be, within the equity, you could do "partial seller financing" where you obtain a first mortgage(which would payoff the sellers remaining balance owed at a minimum) and the seller carries a second mortgage for whatever agreed upon amount.

Sanat Bhandari · Answer

@Garrett Jennings Absolutely, feel free to contact lenders and ask them their thoughts on the same

However, in my experience, if a seasoned investor makes an introduction with their bankers, you're almost certain to get a preferential treatment than if you were to reach out yourself. You an definitely build relationship by just cold calling them but introductions definitely help

Garrett Jennings · Answer

@Sanat Bhandari Awesome, thank you for your response.  I will have to ask around at our REIA and see if others have done this.  Would you recommend I contact lenders directly about this as well?

Sanat Bhandari · Answer

@Garrett Jennings This is highly dependent on the lender. Fannie/Freddie won't allow it as others have mentioned here

However, some local banks/credit unions might be open to it as long as they're in the first position and the numbers on the deal make sense despite the carry back. I know a few of those in our area but sure there would be a small bank willing to do so. Ask around some seasoned investors for recommendations on the same

Be careful though as you're a 100% leveraged in that situation so any wrong move could lead you to lose your shirt

Eliott Elias · Answer

Depending on the loan you can do this, it's called seller carryback.

Scott Crowley · Answer

@Garrett Jennings If this is a seller you believe has some motivation to sell and get a deal done for both sides to come out with a win, I would consider proposing seller financing IF the seller is in a strong equity position at minimum in the property. If there is something to be negotiated there, run the agreement through an attorney for closing and you have a deal.

Can a seller credit me for down payment?

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