Second Mortgage

This week we answer a listener email.

Q: I received a decent offer on my property but the buyer asked me to hold a second mortgage. What should I do?"

A: Seller Financing is becoming more common in today’s market. Traditional qualifying criteria for mortgages have tightened significantly and in general, our ailing economy has made it more difficult for potential buyers to save money.

You may stand to benefit from ‘holding paper’ on the sale of your property. Firstly, you may negotiate the interest rate and terms, and in most cases the rate is higher than traditional financing. You will be earning interest on your equity in the property, and in the end, you will make more money in the transaction. Also, you may qualify for the tax benefits of an installment sale where you can defer a portion of your gain until the loan is satisfied. But of course, check with your accountant.

There are risks to providing seller financing. Most often, your loan is subordinate to the primary financing, and in the case of default or foreclosure, your equity may be surrendered.

There are steps you can take to protect yourself, however, and you should seek the assistance of your attorney and/or accountant. Make sure you verify the credit worthiness of the buyer. Require the buyer to carry hazard insurance on the property and include a due-on-sale clause. Also, in some instances, you can require the buyer to carry PMI to insure your loan against default.

In summary, you should not be scared off by an offer that asks you to hold financing. With professional advice and the proper protections in place, agreeing to participate in the financing can result in a win-win situation.