There are various types of financing available to buyers when purchasing a home. Traditional financing is handled through a mortgage lender or a bank. When a mortgage is obtained to purchase a property, it is usually in first position, which means that if the borrower sells the home or defaults on the mortgage, the lender is the first creditor in line to be paid when the house is sold or the home reverts back to the bank in the case of default.
There are times, however, when the bank will not lend enough money to the borrower to cover the full purchase price of the home. The difference between the purchase price and the amount the bank will lend is typically covered by the buyer as a down payment on the property. In situations where the buyer doesn't have enough money for a cash down payment to make up this difference, the seller of the home may agree to hold a second mortgage on the property to help make up the shortfall. This second mortgage is a seller's second.
Use of a Seller's Second
Seller's second mortgages are typically only used in real estate purchase situations. It can be used to purchase a single-family, apartment, condo or townhouse. Some sellers will also agree to a seller's second on the purchase of a commercial property, although this is less common.
Since the mortgage lender or bank is in first mortgage position, the lender has to agree to allow the seller to hold a second mortgage on the property. A seller's second can only be arranged with the first mortgage holder's consent. This is because it makes the loan riskier to the lender because the borrower doesn't have as much of a vested interest in the property as they would if the buyer had put a larger down payment.
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Terms & Conditions
The interest rate, term and payment conditions on the seller's second are negotiated between the buyer and the seller. Typically, the interest rate on a seller's second is at a higher interest rate than market value because it is a risky loan for the seller since they are second in line to be paid in case of default by the buyer. Monthly payments on the seller's second are made directly to the sell at the agreed-upon rate when the mortgage is established. Generally, seller's seconds are shorter terms (usually less than five years) than traditional mortgages.
A promissory note and a contract should be drawn up between the buyer and the seller. This should spell out all of the terms and conditions of the loan. When legal paperwork is drawn up and a promissory note is signed, a seller's second is as legally binding as a traditional first mortgage.
Recording the Mortgage
The seller can and should file the mortgage (also known as recording the mortgage) with the County Clerk's Office in the county where the property is located. This is a legal filing of the paperwork and it records the mortgage in the public records. This is the same process that a traditional mortgage lender does to record a mortgage.