In a hurry, sellers offer mortgages Loans deliver steady income

January 10, 1993|By Andree Brooks | Andree Brooks,New York Times News Service

People who find themselves unable to buy a new house because bankers have refused to lend to a potential buyer of their current house should consider offering a private mortgage for all or part of the amount.

In this arrangement, the buyer still makes a down payment (which the sellers can use for their next home). The sellers then draw an income from the remainder rather than getting all the money in cash, much like interest on a long-term bond.

This income -- part interest and part a gradual payback of principal -- then helps them meet the payments on any larger-than-anticipated loan they might have to take out on the next home. It's an alternative to renting until market conditions improve.

In Connecticut, for example, sellers have provided financing on nearly 800 homes since June, according to the Commercial Record, a trade newspaper that tracks mortgage activity.

"It is an exceptionally high figure," said Vincent M. Valvo, the paper's editor and publisher.

He attributes the trend to several factors. For one, it has become more difficult for buyers to qualify for loans as lenders continue to feel the pinch of tighter regulation and a backlog of bad loans.

Lenders have also been appraising properties more conservatively, which has kept many buyers from getting as large a loan as they had expected. Thus, unless the sellers are willing to finance the difference, the deal may be dead.

In other instances, lenders are limiting their loans to 70 percent instead of the customary 80 percent to 90 percent of market price. Here again, the sellers may have to finance the difference if the sale is to go through.

That's what happened a few weeks ago in the Fulton Ferry area of Brooklyn, N.Y. The lender was so concerned about the future of the neighborhood that he would advance only 70 percent of the agreed-upon purchase price of $285,000 for a row house. So the seller offered -- with the lender's approval -- to provide the remaining $20,000, said Roberta Faulstick, senior vice president at the William B. May Agency, which handled the deal.

Mr. Valvo said that older sellers who have paid off their mortgages and are not buying another family home are also beginning to look upon seller financing as an annuity, a way to get a better and safer return on their money in retirement than in many other investments.

In New York City, it has become the only way that some co-ops can now be sold, especially in buildings where the sponsor still owns most units.

In virtually every instance in which a seller is under pressure to make a quick sale, brokers will recommend seller financing, because without a lending institution involved there will be less delay.

Clearly, not everyone is in a position to make such an offer.

Brokers find that it works best when the seller's own mortgage is fully paid off or when any small remaining balance can be covered by the down payment provided by the buyer.

But the details of such a deal must be handled with extreme care. Ideally, lawyers say, the buyer should be offered a balloon mortgage that must be refinanced at the end of 10 or 15 years, even though payments will be based on a normal 30-year schedule. This encourages the buyer to obtain regular financing as soon as feasible and prevents the loan from remaining outstanding for too long.

A lawyer will also be needed to draw up the documents and make the necessary credit and income checks. Expect to pay at least $500 extra for the added legal service, said Angelo A. Mastrangelo, a lawyer in Rosewood, N.J., who regularly handles home sales.

An accountant should also be consulted, because there could be tax benefits attached to seller financing, particularly if the sale involves a second home or an investment property.

Sellers should be further prepared, as would any institutional lender, to meet the costs and hassle of a default or foreclosure should the deal turn sour, Mr. Mastrangelo said. But even under those circumstances, they will still get the property back -- and keep the buyer's down payment.

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