Pros and Cons of Seller Carry Back Loans & How Escrow Helps

Are you diving into the real estate world and figuring out what you best options are? Everyone has their preferences when it comes to mortgages, down payments, escrow and other elements of a real estate transaction. So, you need to find out what works for you. Maybe a seller carryback loan?

Not sure what that means? No need to worry, we’re about to explain it all. Let us tell you all about owner carryback loans, the pros and cons of this type of financing and if escrow can be helpful in this process. Let’s dive in and see if this type of loan is the right one for you. 

What Is a Seller Carryback? 

Starting out at the basics, let’s explain what this type of financing actually looks like. Other terms for these loans are seller financing or owner financing, which gives you an idea of what they are.

Carryback loans are essentially owner-provided. The seller of a property carries a portion or all of the financing for the buyer. So, instead of the buyer obtaining a traditional mortgage loan from a bank or other lender, the seller agrees to loan the buyer the money to purchase the property. The buyer then makes monthly payments to the seller, typically with interest, until the loan is fully repaid. 

Seller carrybacks can be an alternative to traditional financing for buyers who may not qualify for a traditional mortgage loan. Still, they also come with some risks for both the buyer and the seller.

How Do You Structure a Seller Carryback Loan?

A seller carryback loan can be structured in a variety of ways, depending on the specific needs of the buyer and the seller. However, some common elements of a seller carryback loan include: 

• The purchase price: The buyer and seller will agree on the purchase price.
• Down payment: The buyer may be required to make a down payment to the seller, which can vary depending on the loan terms.
• Interest rate: The seller will typically charge the buyer interest on the loan at a rate that is agreed upon by both parties.
• Repayment terms: The buyer will make payments to the seller until the loan is fully repaid. The terms of the loan, including the length of the loan and the frequency of payments, will be agreed upon by both parties.
• Balloon payment: Some seller carryback loans may include a "balloon payment" which means that the buyer will be required to pay off a large portion of the loan at the end of the loan period.
• Collateral: The property itself is usually used as collateral for the loan.
• Default and Foreclosure: The terms of the loan should include what happens in case of default and foreclosure procedures.
• Insurance: The buyer may be required to purchase insurance to protect the property, and the seller may also require insurance to protect themselves against potential losses.

Of course, you should have a legal contract in place outlining the terms of the loan and have it reviewed by a lawyer prior to the closing of the sale.

The Pros of Seller Carryback Loans

Lower Down Payment

Saving up for a down payment for a house can be a very difficult task. Luckily, with a carryback loan, a lower down payment is required, compared to traditional types of financing. This can make homeownership more accessible for buyers who may not have enough savings for a large down payment. 

Flexible Terms

Since this isn’t your traditional loan, the terms aren’t as strict as when taking out a mortgage from a lender. The terms of a seller carryback loan can often be negotiated and tailored to the needs of the buyer and seller. 

For example, the seller may be willing to offer a longer loan term or a lower interest rate in order to make the sale happen. Additionally, the loan can be structured with a balloon payment at the end of the loan term.

Faster Closing

Another great thing about this type of loan is that you don’t have to go according to the bank’s timeline. Because the seller provides financing, the process can be faster and more streamlined than going through a traditional lender. This can be especially beneficial for buyers who need to move into a new home quickly, as well as sellers who want to move on from their property as soon as possible.

Potential for Higher Sales Price 

In a seller carryback situation, the seller may be willing to accept a higher sales price in exchange for providing financing. This can be beneficial for both parties, as the seller can get more money for their property, and the buyer can purchase a home they may not have been able to afford otherwise.

The Cons of Seller Carryback Financing

Higher Interest Rate

The interest rate on a seller carryback loan may be higher than the rate on a traditional mortgage. This can make the loan more expensive for the buyer over time and could make it more difficult for them to afford the payments.

Risk for the Seller

If the buyer defaults on the loan, the seller risks losing their property. This can be a significant financial loss for the seller, and it can also be emotionally stressful. Additionally, if the buyer's credit is not good, the seller may not be able to find another buyer as easily.

Lack of Regulatory Oversight

Because seller carryback loans aren’t regulated by the government, there may be fewer protections for the buyer and seller. For example, there may be less oversight to ensure that the terms of the loan are fair and reasonable, and there may be fewer restrictions on how the seller can use the proceeds from the sale.

Limited Options

Not all sellers are willing to offer a carry back loan, so it may be more difficult to find a property that fits this type of financing.This can make it harder for buyers to find a home that they can afford, and it can also limit the options available to sellers who are looking to sell their property quickly.

How Does Escrow Help with Carry Back Financing?

An escrow account can help with seller carryback loans by providing a neutral third party to hold and disburse funds related to the sale. An escrow company is responsible for holding the down payment, the seller's note, and other funds related to the sale, and disbursing them according to the terms of the sale agreement.

The escrow company ensures that all necessary documents and contingencies are in place before the sale can be completed. This can include title searches, property inspections, and other requirements that may be specified in the purchase agreement.

When the sale is complete, the escrow company releases the funds to the seller, and the buyer will start making payments on the seller carryback loan. This process can protect both the buyer and the seller by ensuring that all funds are handled and disbursed correctly, and that all necessary steps have been taken to complete the sale.

Additionally, having an escrow account in place can also protect both parties from fraud and other potential issues. It also provides a level of security, as the funds are released only after all the conditions of the contract have been met.

Of course, this is just one of your options. You could also consider opening a trust account to hold and disburse the funds. Do some research to find out which option is best for you – trust account or escrow.

Need an Escrow Company to Help You?

When it comes to real estate transactions, having an escrow company by your side can make things significantly easier. Whether you need help understanding escrow terms or you need the escrow company to handle the entire transaction, Lightspeed Escrow is here to help!

Our team of escrow experts is here to guide you along the way and make the home buying or selling process go smoothly and quickly. Real estate transactions have never been so easy! Check out our escrow services and rely on our professionals to have your back and make sure things go to plan. We’re waiting for your call!