Holding A Mortgage: Pros And Cons For Buyers And Sellers

A holding mortgage or holding a mortgage is a type of seller financing. As a homeowner, you could choose to act as the lender for a future buyer. This has pros and cons for both the buyer and the seller. The main advantage? Convenience. It can help buyers who don’t qualify for a traditional mortgage, and it can be an opportunity for sellers to earn additional income through regular monthly payments. You can find the details of holding a mortgage and whether to consider it below. 

What Is a Holding Mortgage?

A holding mortgage is seller financing as a nonconforming home loan. Often called a holding mortgage agreement, the seller (current homeowner) acts as the lender for the buyer. In many ways, it functions like a traditional mortgage: the borrower (buyer) makes payments to the seller, who acts as the lender. The seller retains the property title until the loan has been paid in full. 

By financing the purchase, the seller can open the sale to more homeowners and potentially close more quickly. For the borrower, it can be a way to qualify for a mortgage without needing to meet traditional mortgage requirements. 

How Does Holding a Mortgage Work?

In most cases, a holding mortgage is short-term, although that can vary. The buyer and seller lay out the details of the holding mortgage in a promissory note that details all the loan terms, including the interest rate, down payment, and repayment period. Holding mortgages may end with a larger single payment called a balloon payment, although this varies by state laws. 

Holding mortgages may also not be amortized. That means you'll pay the same amount in principal and interest each month rather than paying more in interest early in the loan, as is common with traditional mortgages. 

If you decide to either offer or accept a holding mortgage contract, be sure to carefully check that it also outlines how costs like property taxes and homeowners insurance are paid. While these costs are typically rolled into your monthly mortgage payments, the borrower may be responsible for these expenses paid directly to the insurance company or tax office.  

Here's an example: 

Suppose Rick and Sue are ready to retire and want to move into a smaller property. They are ready to sell their family home. They decide that with current high interest rates, they could benefit from the interest payments by acting as the lender on their property.

Peter decides to buy the home with the holding mortgage offered. They agree on a sale price of $500,000 with a 10% down payment of $50,000. The agreement also outlines an 8% interest rate calculated on a 25-year loan but with a balloon payment due in 10 years for the loan balance. 

Rick and Sue will get monthly payments of $3,473.17 for 10 years, with the expected balloon payment at the end of that term. This gives Peter time to build income and savings or improve his credit score before applying for a traditional mortgage. 

Pros and Cons of Holding a Mortgage for the Buyers

For buyers, getting a holding mortgage offers the flexibility to qualify for a loan without stringent requirements. Here is an overview of the pros and cons.

Pros

• Easier qualification: You will need to meet the seller's requirements, but they are more lenient than mortgage lenders. 
• Faster and cheaper closing: You won't have to pay the bank fees or appraisal costs — unless you choose to.
• Flexible down payment: You won't have to meet bank- or government-required minimums.

Cons

• Higher interest rates: You will usually have to pay higher interest than you would pay to a bank.
• Balloon payments: You will be required to make a single, large payment for the remaining mortgage balance at the end of the loan term, which is often five to ten years. 
• Due-on-sale clause: If the seller has a mortgage on the property, their bank or lender may demand immediate payment on the sale. If the lender isn’t paid, the bank can foreclose. To avoid this, ensure the seller owns the house free and clear.

Pros and Cons of Holding a Mortgage for the Sellers

Here are the pros and cons of holding a mortgage as a seller:

Pros

• Can sell “as-is”: You could potentially sell a property without making repairs or renovations that may be required by a conventional lender.
• Lump-sum option: You could always sell the promissory note for the mortgage to an investor, which would give you a lump-sum payment sooner.  
• Sell faster: You could sell the home faster and close faster, giving you access to regular monthly payments sooner. 
• Retain the title: In case the buyer defaults, you keep the down payment plus any money paid and the house.

Cons

• Buyer default risk: The buyer could stop making payments at any time, which could mean you have to go through the foreclosure process.
• Repair cost: If you have to take back the property, you'll need to pay for any repairs or maintenance, including any damage to the property.
• Dodd-Frank Act: This act refers to new rules related to seller financing. You may need to involve a loan originator, which can negate other advantages. In addition, balloon payments are not always an option. 
• Costly foreclosure: The process can be long and costly if you have to foreclose on the property. 

How Can Buyers and Sellers Protect Themselves From Potential Risks?

Buyers and sellers can protect themselves from potential risk by doing their due diligence. For example, sellers should check a buyer's credit history and verify other financial information such as assets, employment, and income. Likewise, both buyers and sellers should consider working with a real estate attorney to draft the contract and confirm the terms protect their interests. 

Find the Best Nonconforming Loans Benzinga’s Top Providers

If you're looking for other nonconforming loan options, Benzinga's top lenders offer excellent options. Be sure to compare offers to find the most favorable terms for your needs. 

Should You Get a Holding Mortgage?

For sellers, a holding mortgage offers steady cash flow and the possibility of stable returns but comes with significant risk. It is best for owners who no longer have a mortgage on their home and who have other assets or income. Carefully assessing potential borrowers' financial information can help to mitigate risk.

For buyers, if you can qualify for either a conforming or nonconforming loan, you will usually get better terms and less risk than a holding mortgage. However, if you know the seller or cannot qualify for another mortgage option, a holding mortgage could be an option. Remember to do your due diligence on the property and double-check the contract! You can check out nonconforming lenders here!

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