Owner Carryback Mortgages

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What is an “Owner Carryback Mortgage”?

An owner carryback mortgage is a type of lending arrangement wherein the owner of a house finances the entire mortgage or a portion of it for a different person.  The owner-financer is said to “carry” the mortgage for the debtor.  Owner carryback arrangements are often used as a last resort for persons who cannot otherwise qualify for a mortgage.  This type of lending is also called owner financing or simply, owner carryback.

Owner carryback financing usually involves balloon mortgage payments.  Balloon payments are where the borrower must make monthly payments at a fixed interest rate.  However, after a certain period of time, such as five or ten years, the borrower must pay the entire remaining balance of the loan in one payment.  Thus, carryback financing is often a way for a borrower to eventually obtain possession of the home.

What if the Borrower is unwilling to make Payments?

Owner carryback financing is not without its risks- perhaps the most common dispute that occurs is where the borrower becomes unable or unwilling to keep up with monthly payments.  This may happen for a variety of reasons with owner carryback financing. 

First of all, carryback financing is usually reserved for situations where the borrower could not obtain a mortgage from an outside source such as a bank.  Thus, the borrower’s credit may already be affected by previous financial setbacks.  This can result in forfeitures and delinquencies on monthly payments. 

Also, the owner carryback financing is common where the borrower and lender are acquaintances or relatives.  Thus, the borrower may attempt to avoid payments due to the fact that they are acquainted with the owner-lender.

However, none of these factors will relieve a borrower of their obligation to keep up with monthly payments.  If the borrower fails to render payments in a timely manner, the owner-lender may be entitled to recover missed payments and possibly other types of damages.  This is especially true if the borrower cannot make the final balloon payment.

Most of these disputes can be prevented through the use of a well-written contract between the lender and the borrower.  The contract should clearly state the provisions regarding payments, and should also state what the consequences will be in the event of a late or missed payment. 

Do I need a Lawyer for Owner Carryback Mortgages or lending?

Owner carryback mortgages and financing can be a useful option in some situations.  However, both lenders and borrowers should be aware of all the benefits and drawbacks of carry back plans.  If you will be entering into an owner carryback financing arrangement, you may wish to consult with an attorney for advice.  Your lawyer will be able to draft and review a payment contract so that your interests are protected.  Having a lawyer to assist you can help you to foresee issues that you may not otherwise be able to detect. 

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Last Modified: 11-15-2012 11:22 AM PST

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