Seller Carry-Back
Definition and meaning of Seller Carry-Back in real estate.
A seller carry-back is a financing arrangement where the seller of a property acts as the lender, financing all or a portion of the purchase price for the buyer. Instead of receiving the full sales price in cash at closing, the seller agrees to accept monthly payments over time from the buyer.
In more detail
This method is often used when a buyer cannot qualify for a traditional bank mortgage or when interest rates are exceptionally high. The buyer and seller negotiate the interest rate, monthly payment schedule, and terms directly, which are documented in a promissory note and secured by a deed of trust.
In many cases, a seller carry-back acts as a second mortgage to cover the gap between the buyer's down payment and a primary bank loan. Sellers benefit by earning interest on the loan and potentially selling their home faster in a slow market. However, sellers also face the risk of buyer default, which would force them to foreclose to regain the property.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Seller financing, owner financing, owner carryback |
| Watch out for | Foreclosure costs and buyer default for the seller |
| Applies to | Transactions where the seller owns the property free of existing mortgages |
A buyer lacks the credit score to get a bank loan, so the seller agrees to a seller carry-back, allowing the buyer to pay a $20,000 down payment and make monthly payments directly to the seller for five years.
Frequently asked questions
What are the risks of a seller carry-back for the seller?
The main risk is that the buyer stops making payments. If this happens, the seller must go through the legal foreclosure process to take back the property, which can be expensive.
Do you need a bank for a seller carry-back?
No, the transaction bypassed traditional banks. However, both parties should hire a real estate attorney to draft the promissory note and deed of trust to protect their interests.