How Does an Owner Will Carry Work?
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Owner Carry as Part of Your Offer
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Many sellers, especially in competitive markets, may offer to carry all or a portion of the loan to buyers in order to make their home stand out more in the market. Some buyers might favor this option if they're short of investment funds, have a lower credit score, or there are other circumstances that might otherwise prevent them from relying on an institutional lender. You can include an "owner carry" provision in any contract, but your chances of getting the contract accepted are better if the owner has already indicated his willingness to consider such terms.
Basics of Owner Carry
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The difference between the sales price of a property and what the seller owes her lender is her equity in the property. If your purchase price is $200,000 and you owe $125,000, the equity is $75,000. Of course, the lender may not be willing to lend the full $75,000--and a portion of the equity may have to go toward closing costs--but if the buyer is getting an 80 percent first loan from a lender (which would be $160,000), the owner may be willing to lend the buyer the balance of $40,000 as a second mortgage. If the seller owns the property outright, she could, conceivably, lend the buyer the entire purchase price. Terms of the loan are negotiable, but owner carry loans are usually short term (meaning less than10 years), and interest rates are near the current market rates. Qualifying the buyer for the loan is solely at the discretion of the seller.
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Wrap-Around Mortgage
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A wrap-around mortgage or "subject to" mortgage is another form of an owner carry. In this case, the buyer purchases the property with the seller's original financing still in place. The balance of the purchase price becomes a second mortgage. The buyer makes her monthly payments to the seller, and the seller continues to pay on her loan. Safeguards are usually put in place to assure that the seller continues to make her mortgage payments. Be aware, however, that if the seller's original lender becomes aware of the sale, it may call its loan in "subject to" the sale of the property.
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- Photo Credit Image by: At.morey.tota, Creative Commons
