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.
Here’s what I’d like to do:
We buy a home and then sell it through traditional means (MLS) or Lease Option it. Our buyers obtain traditional financing from an institutional lender for the 1st mortgage (80%). We would then finance the last 20% as seller/owner carry.
For clartity, an example:
FMV is 100K. We purchase for 90K. With a little sweat equity and good terms We sell it via traditional methods (i.e. MLS) or L/O it for 111K and carry 20% as owner financing. Our buyer would have to go find a loan for the first 90K.
The problem I’m having with this is it seems that mortgage lenders/brokers won’t do this without sub-prime financing.
Why, anytime seller tries to carry on a 2nd does it go straight to sub-prime rates? Dooes the buyer have to go sub-prime to get a 1st?
Conventional loans do not allow an 80/20 with a seller 2nd. Some Alt-A programs will allow but that is for borrowers with 620-640+. The rates for the Alt-A are just about the same as subprime right now so that’s why you are seeing most of the borrowers with a subprime loan.
Just an FYI…There are quite a few lenders that allow a 90% 1st with a 100% seller 2nd. There may be issues with seasoning as some require the seller to own them either 6 or 12 mos.