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Seller Financing Tips for Creating Seller Carryback 2nds

Seller Financing and Carrying back a 2nd

Seller financing can be a useful technique and facilitate a faster sale of real estate, but it is not without risk.  Carrying back a 2nd or junior mortgage behind a third party senior loan has additional risks as compared to carrying back a 1st mortgage.

Pitfalls and Risks of a Junior Seller Carryback 2nd

  • Default of the senior note – If the borrower stops making payments to the senior loan, you may not find out about it until many months after the fact, once the senior lender begins foreclosure.  At that point, you will have to pay any arrears to the senior loan in order to stop their foreclosure and begin your own foreclosure process.  This is the biggest risk, especially if you are not able to come up with the money to reinstate the senior lien.
  • Default on your note – you may have to begin foreclosure and take the property back.  This can be time consuming and expensive, depending on your state foreclosure laws.
  • Due on sale after foreclosure – after you take back the property due to foreclosure, it often violates the due on sale clause of the senior lien holder and they can begin foreclosure. It is not very common for a senior lien holder to do this, and it is not something senior lien holders usually watch for or even notice. But it is possible and does occur.  This is more likely if interest rates have risen.
  • Unattractive senior terms, or senior has an adjustable rate, high interest rate or senior is negatively amortized. These will all contribute to higher default risks for the borrower.

Solutions and Tips for Junior Seller Carryback Notes:

  • Wrap around mortgage AIDT – with this technique, the borrower pays you, and you pay the senior lien holder.  This is effective for monitoring the status of senior loan payments.  You always know when either is late, and can react accordingly, and continue to pay the senior even if the borrower has not paid you.  This way you can begin foreclosure without the senior foreclosing.
  • Carryback a 1st instead of a 2nd  - Safer although your sales proceeds will be smaller.
  • Instead of carrying back a big first, consider splitting it and carryback a 1st and a 2nd – this may give you more options down the road to sell the senior note.
  • Add Collateral – If the buyer has other real estate, cross collateralizing the note always makes a note more secure, more is better.  This can be done with personal property also using UCC filings.
  • Add guarantors / co-signers  - cosigners may be more willing to step up and make payments if the borrower defaults, since their credit is on the line.
  • Bigger down payment – gives you more equity protection.
  • Request for Notice – by recording this document, the senior loan will be obligated to notify you sooner in the event of a default on the senior lien.
  • Permission for Verification of Mortgage (VOM)– The borrower of the senior mortgage has to give permission to you (the junior lien holder) in order for a senior lien holder to release information to you.  Get this document signed and ready, in case you need it down the road.
  • Call the Senior Lien holder periodically and get a status of payments. This is commonly called a “Verification of Mortgage” (VOM).
  • Make sure the buyer/borrower can afford the payments, check their job, income, get a copy of their credit report and SSN#.

Other Tips for Carrying back a 2nd mortgage – Terms of the note

  • Make sure your 2nd is due after the 1st is due
  • Make your interest rate higher than the senior interest rate – encourages borrower to pay your junior note first if they have extra cash.
  • Amortize the note – so that the balance decreases over time, always safer than a balloon note.
  • Have a hefty late payment penalty – maximum allowed by law, to encourage on time payments.

If you still feel uncomfortable selling by carrying back a junior 2nd mortgage, consider selling with a lease option or land contract (AKA contract for deed) instead, until the buyer has a bigger down payment. Also consider just leasing the property without an option to buy, with the possible opportunity to buy when their financial situation is better.

It is recommended that you discuss these issues with a real estate agent or attorney hired by you (not your buyer).

Also Read this Article:  Tips for Creating a Seller Carry-back Real Estate Note

This information can be useful to:

Home Sellers, Home Buyers, Note Buyers, Attorneys, Accountants, Financial Advisors, Real Estate Agents, Business Brokers.


I am not an attorney, nor a tax accountant, laws vary from state to state, and any legal advice implied by this paper should be checked with an attorney and/or tax adviser in your state.

About the Author:

I am a real estate broker licensed in the State of California as well as an investor of real estate and debt instruments. We buy real estate notes and real estate contracts nationwide and make private and hard money loans on real estate in California.

I hope you find this information useful, feel free to contact me with any feedback, or if you are contemplating selling a real estate note.

-James MacArthur

JMAC Funding
PO Box 91472, San Diego, CA  92169
(619) 846-1550 voice
(815) 572-5600 fax
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