How a Note is Born
Sometimes referred to as “seller carry-back” mortgages, owner financed mortgage notes are created when the seller of a home or property decides to finance the property himself /herself and to “carry” a note from the purchaser. Such carry-back mortgages are often created as the result of the property being difficult to sell or when the purchaser has difficulty qualifying for traditional mortgage financing due to bad credit, too much additional debt, etc. Simply put, an owner financed mortgage note is a promissory note secured by a mortgage on real estate.
A Note is Born
At any given time, it is estimated that there are billions of dollars of owner financed mortgage notes in existence. Owner financing has been utilized successfully for many years and is becoming more common as larger numbers of individuals fail to qualify for the purchase of a home.
Case Study Example
Bill has a house for sale which is priced at $150,000. It has an existing assumable mortgage from a local bank with a balance of $100,000. Being assumable, the existing mortgage can be taken over by a new buyer without taking out a new mortgage.
A buyer approaches Bill with an offer. The buyer explains that he has a $25,000 cash down payment and with the existing mortgage being assumable, was prepared to offer Bill $125,000 for his home. He further explains that he had just moved to the area to take a new job and it was unlikely that a local bank would provide the additional $25,000 in financing so the $125,000 offer was as high as he could go.
Rather than accept the low offer of $125,000, Bill provides a better solution. He offers to provide the additional $25,000 in financing himself by holding a second mortgage note. The note will be payable interest only at a rate of 10% and with a 7 year balloon clause. This means Bill will receive an income of $2,500 per year (payable in monthly installments) and a lump sum or $25,000 at the end of the seventh year.
The buyer accepts Bill’s terms. He has the house he wants at a fair price. Bill is pleased because he sold his house for full price and has also created a high yield income stream with a very familiar collateral. An owner financed mortgage note is born.
