The real estate market has been showing signs of slowing and more and more properties are advertised for sale; however, one real estate transaction type is gaining in popularity and that is the "seller second". In such a scenario, the seller holds a second mortgage allowing the buyer to purchase the home with little or no-money-down. The down payment or a portion thereof is effectively financed with the "seller second".
Since the first mortgage balance will be less than 100% of the sale's price, there is a lower inherent risk to the first mortgage lender who in turn is willing to approve a buyer who would otherwise not qualify for a no-money-down first mortgage. This dramatically increases the pool of potential buyers and that leads to a quick sale in today's market.
Typical minimum credit score requirements for a no-money-down loan are 580 or above; but, with the assistance of a 5% (5% of the sale's price) "seller held second", a buyer can purchase a home with a 550 credit score. With a 20% seller held second, a buyer with a 500 credit score can buy a home no-money-down. With a 35% seller held second, there are no credit score requirements for the buyer.
After closing, the buyer will have two monthly mortgage payments, one payment to the first mortgage holder and a second payment to the seller. The second mortgage is typically structured as a thirty-year amortization with a five-year balloon. At the end of the first year, the buyer can refinance the first and second mortgage into one new first mortgage and at that time the seller will recoup the balance of the "seller second". In the meantime the seller will receive interest only payments from the buyer.
A year ago, it was a seller's market. Properties were selling as soon as the real estate 'for sale' sign was planted in the yard. At that time, it was not uncommon to hear of bidding wars in the driveway and the subject property would end up selling for more than the asking price. Now we are in a different market. We have entered a buyer's market. Properties remain listed for sale for periods of time that exceed a sellers comfort level. Driving down a typical street in Any Town, USA, one might see numerous 'for sale' signs and even signs reading the likes of "price reduced". Reducing the price of a house does not significantly increase the pool of buyers that potentially qualify for financing for that property and therefore, demand remains unchanged as the result of a price reduction. The solution can be found through offering a "seller second".
A "seller second" effectively increases the number of buyers that qualify for financing and subsequently increases the demand. FICO statistics seem to indicate there are approximately 25% of the scorable population in this country that have a credit score between 500 and 649. Offering a "seller second" to buyers in this range can turn them into qualified borrowers and happy homeowners.
To offer a "seller held second", a seller will need to have sufficient equity in the property. Also, sellers need to understand that there is a risk of default by the potential buyer.
