What you need to know about seller-financed mortgages

With a seller-financed mortgage, the person selling the home acts as the lender. No bank or mortgage lender is involved. The buyer purchases the home under an installment sale arrangement, which means that they pay for the home with monthly payments based on a mortgage contract negotiated by the buyer and the seller. The buyer makes mortgage payments directly to the seller. A seller-financed mortgage is sometimes also called a take-back or purchase-money mortgage.

Many seller-financed loans are a type called a wraparound mortgage. A wraparound is similar to other seller-financed mortgages in that the seller acts as the lender and the buyer makes monthly payments. The difference is the seller keeps their original mortgage and continues to make payments

Every month the seller uses part of the payment to pay on their original loan. The seller provides financing for an additional amount that covers the home’s remaining purchase price. The seller's original loan and the additional balance the seller finances create the wraparound mortgage.

The interest rate on a wraparound mortgage is usually a little higher than the rate on the seller's original note, but it is often lower than interest rates available from conventional lenders. This can create be a good deal for both the seller and the buyer.
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One of the things buyers need to remember is that when they have a seller-financed mortgage, their taxes and insurance will not be included in the monthly payment. These costs are often included in a conventional loan. These bills will be due annually or semi-annually, so it is important to have those expenses saved when they come due.

It is also important to have an attorney take a look at any seller-finance contract. The buyer will need to know what will happen if the seller dies and the seller needs to have sound remedies in place in case the buyer defaults on the mortgage.