“Seller held seconds” are back!

The real estate market has been showing signs of slowing and more and more properties are advertised for sale; however, one real estate transaction type is gaining in popularity and that is the “seller held second”.  In such a scenario, the seller holds a second mortgage allowing the buyer to purchase the home with no-money-down.  The down payment is effectively financed with the “seller held second”.

Since the first mortgage balance will be less than 100% of the sale’s price, there is a lower inherent risk to the first mortgage lender who in turn is willing to approve a buyer who would otherwise not qualify for a no-money-down first mortgage.  This dramatically increases the pool of potential buyers and that leads to a quick sale in today’s market. 

Typical minimum credit score requirements for a no-money-down loan are 580 or above; but, with the assistance of a 5% (5% of the sale’s price) “seller held second”, a buyer can purchase a home with a 550 credit score.  With a 20% seller held second, a buyer with a 500 credit score can buy a home no-money-down.  With a 35% seller held second, there are no credit score requirements for the buyer.

After closing, the buyer will have two monthly mortgage payments, one payment to the first mortgage holder and a second payment to the seller.  The second mortgage is typically structured as an interest only with a five-year balloon.  At the end of the first year, the buyer can refinance the first and second mortgage into one new first mortgage and at that time the seller will recoup the “seller held second”.  In the meantime the seller will receive interest only payments from the buyer.

To offer a “seller held second”, a seller will need to have sufficient equity in the property.   Also, sellers need to understand that there is a risk of default by the potential buyer.