Posted by RJ Baxter on June 13, 2006 at 09:18:42:
Not sure why this would have to be subprime necessarily, but some lenders won’t allow seller carry 2nds. The lender calculates the combined loan to value ratio based on both the 1st mortgage they are obtaining through the bank + the seller carried 2nd. This would apply to subprime or conventional financing.
Another key point is that in a purchase transaction, the lender will only lend on the lesser of appraised value or sales price, so in this case, $90K- and that includes the seller 2nd. In your example, the buyer would be borrowing $111K based on a $90K sales price, which every lender that I’m familiar with won’t allow. This may be why it has to go subprime- perhaps the buyer’s lender has a subprime source who will go off of appraised value instead of sales price, but I have not heard of this with any lenders.