With mortgage lenders tight on cash, some buyers and sellers are striking up their own financing arrangements to get the deal closed.

Five years ago, no one would have guessed that skinny jeans would return to fashion's forefront. In much the same way, seller financing wasn't even a consideration back when the mortgage industry was hopping. But now that conventional mortgages are in short supply, conditions are right for seller financing to make a comeback.

Do-it-yourself mortgages

They say that if you need something done, you might as well do it yourself. More and more home sellers are taking that advice, because there aren't enough buyers qualifying for traditional mortgage financing. When sellers need to unload their properties, they can choose to finance some or all of the purchase themselves.

Seller financing comes in different forms:

  • First mortgage. The seller acts as the buyer's only mortgage lender, financing the full amount of the purchase or the full amount less a down payment. Because the buyer doesn't qualify for a traditional mortgage, the terms of the seller financing should be carefully negotiated to protect both parties. This arrangement is usually not an option if the seller is carrying mortgage debt on the property being sold. Most mortgages have an alienation clause which allows the bank to demand immediate repayment if the collateral property is sold. This means that the seller can't carry the financing unless the buyer's down payment is large enough to pay off the seller's existing mortgage.
  • Seller-financed second mortgage. The buyer could obtain a bank mortgage for a portion of the purchase amount, and arrange a seller-financed second mortgage to cover the balance. Under this arrangement, the seller receives the first mortgage portion of the sale proceeds immediately. But the seller also accepts a lower priority lien on the second mortgage amount. If the borrower defaults and the house must be sold, the seller is only repaid after the first mortgage lender is repaid.
  • Lease purchase or lease option. In a lease purchase arrangement, the buyer and seller negotiate a property lease for a specified term. As part of the agreement, the buyer must purchase the home for a stated price, within a certain time frame. An upfront payment may be made to the seller. Normally, some portion of the monthly lease payments are applied to the purchase price of the home. During the lease term, which can be several years, the buyer must seek out lender financing. Once that's secured, the buyer pays off the seller and completes the sale. Lease option arrangements are similar, except that the buyer isn't obligated to purchase the property.

In fashion and financing, trends move in cycles. For now, sellers might have to put up their own financing until the mortgage industry rights itself. Most likely, the debt can be transitioned into a more traditional structure in a few years. By that time, skinny jeans and the mortgage crisis may both be a thing of the past.

Published on May 8, 2008