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How is owner financing or carry back loan useful?

[b:a55748ce7b]Owner financing[/b:a55748ce7b] or carry back loan is useful because:[list:a55748ce7b][*:a55748ce7b]It is a good source of income and helps to sell the property quickly as there is no fixed criteria for buying it.

[*:a55748ce7b]It becomes a good option when the property can't be financed by any means or when the owner has a lot of equity in his property but may not need the money paid by a lender at the closing of a mortgage.

[*:a55748ce7b]The rate of interest offered by a seller can be more reasonable than that offered by any other lender.

[*:a55748ce7b]If the prices in your area are high or if the sale price you aim at exceeds the estimated property-value, you can close the sale quickly by financing the entire part or a fraction of the purchase yourself.

[*:a55748ce7b]In case a buyer defaults, the deal ends. The seller can then keep whatever down payments and monthly installments the buyer has paid till that period, and sell the home again at its market price to another buyer.

[*:a55748ce7b]Since the seller can spread out gain for a long period or postpone all of it, therefore his tax liability is reduced.[/list:u:a55748ce7b]

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Would capital gains tax be due on the entire purchase price if I carry back the loan and the buyer only pays me a down payment of 1/5 of purchase price or do I only pay capital gains tax on the amount received for the down payment. It is an interest only loan for 3 years.

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi,

As far as I know, there is an installment method for selling properties where the buyer gets the title to the property after he makes the down payment.

The seller has to pay capital gains taxes only on the proceeds received through the down payment in that particular tax year.

Thanks,
Jerry

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Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi,

In an installment sale, being a seller you will have to pay capital gains taxes only on the sale proceeds obtained in that tax year. For instance, if the buyer has paid 40% of the sales price in the first year, you pay only 40% of the capital gains taxes.

Being the seller, you will be paying capital gains taxes on the profit of the sale, and it doesn't matter if you get the entire sales price in one single amount or through mortgage payments for a certain loan term.

I would suggest that you consult a tax advisor regarding the maximum amount of taxes that you will have to pay.

Thanks,

Caron.

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helping_user's picture
helping_user | Joined: March 31, 2006 03:39 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Gal,

I have heard that you can defer taxes indefinitely if you sell off your home that has been your primary residence for a year. Also, you can defer taxes if you shifting to a house which costs as much as the price of the previous property or more than that.

But if you are giving the buyer a mortgage, then you should be paying ordinary income taxes also and that too, on the interest you receive each year on the loan.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I'm not sure what that means if my buyers want me to carry the loan?

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miller_st's picture
miller_st | Joined: January 17, 2007 04:47 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Eileen it means that the buyer would be borrowing from you instead of or in addition to from a mortgage lender. It is sometimes done when a buyer is not able to [url=http://www.mortgagefit.com/Mortgage-Basics/do-i-qualify-for-a-mortgage.h... for a mortgage[/url] for the full amount of the purchase.

Miller

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

my buyer would be borrowing most of the money, but wants me to "carry back about $30,000 --they would "own " the home, correct? My name is off the title and theirs is on?? Then what happens if they default? Do I get to "repossess" the home?

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi justine.

Welcome to the forum.

In Owner financing the title will be on the buyer's name but he is getting the financing against your property. So you can repossess the property if the buyer defaults.

Best of luck,
Larry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

so are you saying that I have a "liability" if she does not pay on her "first" mortgage to the bank?? What do you mean he is getting the financing AGAINST my property (what property) --- is my name somehow legally tied to the property we are selling? I am a little scared to do this.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Also, if I can reposess the house - do I have to assume their first mortgage? I could not afford to pay for my new house and pay for this mortgage also.

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Justine.

The buyer is taking out the first mortgage for what? Certainly to pay the seller ... that means to you ... right. So you are getting most of your money and rest you are giving loan to the buyer. So the title should be on the buyer's name and it will be no longer your property.

Now it will be a secured loan backed by the property. So, if the buyer fails to make the payments to you then you can foreclose and certainly the first mortgage lender will have the first right to get his money back.

Best of luck,
Larry

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cliff3's picture
cliff3 | Joined: May 5, 2008 02:15 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Justine and welcome to the forum,

With the type of transaction you are talking about there are several things we have to look at:

First, the carry back is a “loan” you are giving to the buyer. You would be in what we call “second lien” position. Yes, if they default you can foreclose on the property; however, you will have to pay off their first mortgage before you would receive the property and/or any money.

Second, if the home owners miss payments on their first mortgage the first mortgage could foreclose and they do not need to notify you. Since, you are in “second lien” position. Even worse is they could sell the property at a foreclosure auction just to get their loan money back and leave you stuck with nothing. You would have the right to go after the homeowner but, for what they would have no money.

Owner financing is good when you are the “first lien” because worst cast scenario you can foreclose and get your money back or get the property back.

Hope this helps if not ask a question I have done several of these types of transactions. :D

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Is buying a home with owner finance good for a investor to do? If so, why?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My home can not appraise for what the buyers have offered us. If i carry back to them does my home still need to appraise for that purchase price? Does my home need to be completly paid off inorder to carry back?

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sara's picture
sara | Joined: July 5, 2006 03:16 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Ryan,

Owner financing is a good option for investors as it offers higher rates of return. A seller needs to negotiate an interest rate that the buyer should pay them. This interest rate should be more favorable compared to any other type of investment that the seller may have thought of.

If the seller can structure the owner financing as an installment sale, he may get certain tax benefits on capital gains. Any investor going for owner financing should consult a tax advisor for the maximum tax advantages.

Take Care

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Gwen,

Your home should be paid off prior to selling it off through owner financing. What's the difference between the home purchase price and the appraised value?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hey Sara,

I think that you misunderstood the spirit of my question. I am looking at this through the eyes of a investment buyer. It is important to a lot of investors that they never spend their own money nor use their own credit to finance a deal. With that being said, what other upsides do you gain owner financing rather than getting a conventional mortgage?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi gwen!

Welcome to Forums!

Appraise value and purchase price can't be same for a house. They are more of less closer to each other.

Coming to your second question, it is always better to pay off before you carry back. In case you don't pay back and the lender comes to know then he can take legal actions against you.

Feel free to ask if you have further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have my home with mortgage and am needing to sell due to job relocation. I am considering offering owner [url=http://www.mortgagefit.com/refinance.html]refinance[/url] to potential buyers. Looking at the options, I am thinking the deed of trust where they would be given time of 3-5 years to secure their own financing for payoff. What is recommended for down payment, does that have to go to the home or put as earnest money? Also, as the seller, what tax advantages, besides the mortgage interest and property taxes do I have? All they would have is the morgage interest they pay to us, right?

I am trying to learn all I can before I get into something here.

Dorene

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Dorene!

You and the buyer can decide as to how much down payment you will be taking. You can then decide on the monthly payments and the rate of interest you will be charging the buyer. Owner financing also allows the seller to postpone their tax liabilities. In some cases, owner financing will also reduce their tax liabilities.

Check out the link given below to know more about owner financing:
http://www.mortgagefit.com/owner-financing.html

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My buyer wants to take over payments and house insurance payments and pay the taxes. They want to one day own the home. They agree we need to get an attorney or title company. Is this owner finance? Do we need to ask for a down payment? We owe about 78,000.00 on the home. I am so confused- what should we do??

Lisa

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Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Lisa,

When you sell home to a buyer who takes over the payments officially, it is known as mortgage assumption. That is, the buyer takes over the entire responsibility of the mortgage loan and your name is removed from it. But yours is a slightly different scenario.

It's not a case of owner financing wherein a buyer purchases your house and instead of paying you the sale price in lump sum cash makes monthly installments. The entire transaction is drawn up by an attorney mostly in the form of a mortgage. So, if the buyer defaults, you take away your home.

But prior to selling your home to someone, you need to inform your lender. Here the buyer simply wants to take over your mortgage payments. What he wants is, he'll stay at a tenant in your property and pay for your mortgage. After some years, when he has the cash, he'll buy the home.

I hope I could explain the entire situation. If you think there's something missing, just let me know.

Good luck

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

WHO WOULD HANDLE THE PAPER WORK FOR ME?
COULD I HAVE THE BUYER HANDLE ALL CLOSING COSTS?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi TONYMAL!

Welcome to forums!

You can contact an attorney. He will handle the paperwork for you and also draft the owner financing agreement for you. Yes, you can have the buyer handle the closing costs.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

we have in the process of buying a house the owner will carry the house is paid in full thers no loan .....my question is what happen if the seller is the frist on the lien? excuse my spelling my english is not good

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

While you owner finance the property, you will have to sign an agreement with the seller. This agreement will include the required terms and conditions of the loan. In this case, you would be the borrower whereas the seller will be the lender. As per the agreement, he will be able to take required steps against you if you default the loan.

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katmik's picture
katmik | Joined: February 22, 2010 11:20 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

So, as I understand it, if we ask 50% down(approx 125,000) and carry the balance (approx 125,000), if the buyer takes out a loan for the down and defaults on the loans, the bank that holds the first lien can foreclose and take the whole property? It seems that it would be wise to accept only cash for the down.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What can happen if I carry the loan as a first mortgage, but make it a balloon mortgage to be paid in 15 years.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

The buyer will have to refinance the loan after the 15 year period when the balloon becomes due.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am in the process of buying a house where the road is taking out the houses. This individual bid on the house and bought it. Now he is selling it to me . we signed papers for number xxx dollars to buy the house to put on my vacant lot. After the lot was ready, he called me and said he would put the house on the lot the next day. We had not discussed terms of financing other than they would be doing the financing with my lot as collateral. When he told me how they done their financing I had never heard of this before. He told me then their method of financing was swapping checks. How he told me this works was he would give me a check in the amount of the house . I was then supposed to write him a check for the same amount. I have never heard of a transaction in this manner. Can you explain how this would work? Curious and puzzled!

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Were would I go to get the paper work needed for owner carring the loan?

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sara's picture
sara | Joined: July 5, 2006 03:16 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Ray,

I have never heard of swapping check method. I would suggest you to contact an attorney and take his opinion in this matter. He will guide you in this case. As far as the owner finance agreement is concerned, you should contact an attorney and he will draft the agreement for both of you.

Take care

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Do I have to go to an attorney to write the contract for the sale? I want to make sure I get paid and that the buyer pays me the monthly installment on time, lot rent, insurance and taxes.

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Margarita,

It will be better if you could contact an attorney and take his help in drafting the deed for sale. This will make sure that you get paid for the property that you're selling.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I the seller carries back a 120k and he is being paid in installments, when are is taxes do and what amount whould they be based on

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

as the buyer can the seller take out a second or third mortgage without the buyers knowledge, and does the buyer still need to have an appraisal of the property before buying from the seller.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome chunk,

The seller can take out a second or a third mortgage before he sells off the property to someone else. the buyer should make sure that he appraises the property before buying it from the seller.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

what if the owner has a second morgage that is considerablly higher than the appraised value. can the person who will be taking over the payments arrange an agreement for the value of the properity and leave the owner to pay the difference created by their second loan. if so does the bank need to know and how can this effect the person that is taking over the payments if the owner defaults on their portion.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi bab,

Before buying the property, the buyer should ask the present owner of the property to pay off the second loan in full. If the loan goes into default, then the lender will have the rights to foreclose the property and recover the debts. It is always better to buy a free and clear property rather than a property which has mortgages on it.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi I am very confused on this but can a property give enough equity to purchase another home possibly 2 more that when one defaults all three default?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Ady,

If you have equity in your property, then you can use it in order to purchase a new property, even two properties. If you're unable to pay off the loan, then the lender will foreclose the property which has been used as a collateral in order to get the loan.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi can anyone tell me if I am getting a good deal and how this works. I was told the owner would finance me with 8000.00 down and take over mortgage of 925.00 a month. Hoa fee 125.00 a month paying sellers bank and that house would be put in my name. Basically I'm just paying the mortgage to her bank with her interest rate I'm really scared she has realtor who is drawing up papers and lawyer and title company. I can not afford legal advise..... Help please

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Kristy,

To know all about owner financing, check out the given page: http://www.mortgagefit.com/owner-financing.html

Thanks

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