Lender Won't Originate Loan with Seller Carry Involved?

Question

So, my lender just indicated she could not issue a sellable mortgage with a seller carry-back involved...and further indicated that portfolio lending applies the same guidelines?...is this an institutional standard or lender-specific?

Deal

4 unit residential apartment building

purchase price $87k

seller carry $20k

total financed $67k

Deal

4 unit residential apartment building

purchase price $87k

seller carry $20k

total financed $67k

Brandon Sturgill · Answer

Thanks for taking the time to respond @Tamara Elliott-Deering Account Closed

Chris Mason · Answer

Thanks, @Steve Vaughan.

@Brandon Sturgill - Close it with your cash for the down, originate the seller-carried 2nd post-close to put that cash back in your pocket (this can literally be the next day). Note that gifts also cannot be used for down payment on investment properties.

You are very unlikely to find a lender, hard money or otherwise, willing to to the deal if you don't have some skin in the game... for at least one day.

Steve Vaughan · Answer

Yep, agree with Account Closed!

Account Closed · Answer

@Brandon Sturgill, I just wanted to chime in with my 2 cents. I'm sure your lender is correct that a secondary market mortgage cannot have seller carry-back financing involved. However, to her second point & your question...portfolio lending will not have a "standard" like conventional loans typically do and therefore seller carry could be considered.

It will be Bank by Bank and there are a bunch of factors that will be considered of course. In my opinion a Bank considering seller-carry as a part of their financing package would like to see some kind of compensating risk factor for less "skin in the game" by the Borrower. It could be as simple as the Borrower is very strong and a good customer...higher interest rate...or a # of different things.

I believe your challenge with the proposed deal listed above is that it's 0% down and the $ amount is small. I've personally seen this happen more on bigger deals where maybe it was 75/15/10 Bank/Seller/Borrower. Nothing is impossible though and my main point was that there is no standard portfolio loan structure rules.

Tamara Elliott-Deering · Answer

There will be others who reply with more specific information but it may be something to do with the lien position. There are lots of lenders and lots of financing types out there, I would hit the phone in your local area, call the bridge guys and the portfolio guys, even the hard money guys and see what they say. It's good to get to know them anyway.

John D. · Answer

Chris Mason I agree in principle, close the first, then the second and was going to say something similar, but when I think about how that would actually work I can't quite put the pieces together.

--Buyer closes on house with first mortgage and $20k cash.

--Escrow gives seller $20k.

--Second mortgage is originated, and seller gives $20k back to buyer.

How would one make sure the seller would follow through with the second mortgage?  Perhaps a very flexible title company would hold the $20k, if the contract with the seller called for it?  I am curious as to whether anyone here has done this before, I have 2 properties where I will be faced with a similar dilemma when I refi in a few months....need to maintain the 2nd mortgage through a cashout refi of the first.

Brandon Sturgill · Answer

Chris Mason So I would have a note for the transaction (me 25%LTV/ Lender 75%LTV) and hold title in fee simple...right?the transaction would be closed, wouldn't it?...so, would I originate the seller carry-back prior to closing the deal?....not fully understanding the "retroactive" financing for the seller who is no longer the owner of the property...

Thanks for the help.

Chris Mason · Answer

@Brandon Sturgill read @John D.'s post.

John D, so technically the contract can't call for it because you're not supposed to hide contract addenda from the lender, and as soon as the lender sees that addenda we're back at square 1 - "nope, can't do it."

The seller needs to want to do this.

re: your HELOC question. If your lender normally closes in 30 days, plan for a 60 day close if you want to keep that HELOC. Resubordinations happen, but it'll be a few hundred dollars underwriting fee to the HELOC lender and 20-30 days for the HELOC lender to approve it, and it's a LLPA on your new first mortgage that you can pay out of pocket, roll into loan amount, or bump rate, to pay for. Also note that CLTV limitations will apply here; CLTV is combined loan to value of all liens, with those liens that are revolving maxed out. So 80% first, and and a 2nd that if maxed would be 30%? 110% CLTV, not going to happen.

Or you can pay off and close the 2nd mortgage, and re-originate it post-close.

Lender Won't Originate Loan with Seller Carry Involved?

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