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Home sellers who hold a mortgage are essentially acting as the lender, making it easier for buyers to qualify and creating a new revenue stream for the seller.
A holding mortgage or holding a mortgage, is a type of seller financing where the homeowner acts as the lender for future buyers. The main advantage for buyers and sellers? Convenience. It can help buyers who don’t qualify for a traditional mortgage and can be an opportunity for sellers to earn additional income through regular monthly payments.
In this story, we’ll answer the question “What is holding a mortgage,” explain how it works and the pros and cons for both sides.
What is Holding a Mortgage?
“A holding mortgage is when a seller is the one who provides financing for their buyer,” says real estate expert Adam Hamilton, co-founder of REI Hub, an accounting software for rental property owners. “They become the lender and until the mortgage is entirely repaid to them, they keep the title.”
These are nonconforming home loans and are sometimes called a holding mortgage agreement.
By financing the purchase, the seller can open the sale to more buyers and potentially close more quickly. For the borrower, it can be a way to qualify for a mortgage without needing to meet traditional mortgage requirements.
Pros
- Easier qualification
- Faster and cheaper closing process
- Flexible down payment options
- Creates additional income stream for sellers
Cons
- Higher interest rates
- Seller assumes most of the risk
- Balloon payments
How Does Holding a Mortgage Work
In most cases, a holding mortgage is short-term, although that can vary. The buyer and seller lay out the details of the holding mortgage in a promissory note that includes all the loan terms, including the interest rate, down payment and repayment period. Holding mortgages may end with a larger single payment called a balloon payment, though this varies from state to state.
Holding mortgages may also not be amortized. That means you’ll pay the same amount in principal and interest each month rather than paying more in interest early in the loan, as is common with traditional mortgages.
If you decide to either offer or accept a holding mortgage contract, be sure it also outlines how costs like property taxes and homeowners insurance are paid. While these costs are typically rolled into your monthly mortgage payments, the borrower may be responsible for these expenses paid directly to the insurance company or tax office.
Here’s an example:
Suppose Rick and Sue are ready to retire and want to move into a smaller property. They are ready to sell their family home. They decide that with current high interest rates, they could benefit from the interest payments by acting as the lender on their property.
Peter decides to buy the home with the holding mortgage offered. They agree on a sale price of $500,000 with a 10% down payment of $50,000. The agreement outlines an 8% interest rate calculated on a 25-year loan but with a balloon payment due in 10 years for the loan balance.
Rick and Sue will get monthly payments of $3,473.17 for 10 years, with the expected balloon payment at the end of that term. This gives Peter time to build income and savings or improve his credit score before applying for a traditional mortgage.
Should I Get a Holding Mortgage?
For sellers, a holding mortgage offers steady cash flow and the possibility of stable returns but comes with significant risk. It is best for owners who no longer have a mortgage on their home and who have other assets or income. Carefully assessing potential borrowers’ financial information can help mitigate risk.
For buyers, if you can qualify for either a conforming or nonconforming loan, you will usually get better terms and less risk than a holding mortgage. However, if you know the seller or cannot qualify for another mortgage option, a holding mortgage could be an option. Remember to do your due diligence on the property and double-check the contract. You can check our list of the best nonconforming lenders.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with real estate expert Adam Hamilton, co-founder of REI Hub, an accounting software for rental property owners.
Frequently Asked Questions
A
Holding a mortgage means that a home seller keeps the title of a property until a buyer finishes making monthly mortgage payments to them. Essentially, the homeowner acts as their own lender.
A
There are no time limits on how long you can hold a mortgage.
A
A mortgage holding account is a bank account that holds funds used to pay property taxes, homeowners insurance and other monthly payments that aren’t your mortgage. This account is set up by a mortgage lender and is sometimes called a mortgage escrow account.
Sources
- Adam Hamilton, co-founder of REI Hub
