Holding A Mortgage: Defined & Explained
Megan Polom4-minute read
November 18, 2020
It’s rare to find something that is truly one-size-fits-all, and mortgages are no different. At its most basic definition, a mortgage is a loan you can use to buy or refinance a home without having to pay cash up front. In order to get a mortgage, you must qualify first. This means you must meet the income and credit requirements before being approved for the loan.
Most homeowners go this route. But what if the typical terms of a mortgage aren’t appropriate for your situation? One thing you can do is get something called a holding mortgage — an alternative type of mortgage typically used for those who may not qualify for a traditional mortgage. Read on for more information on how a holding mortgage works and the pros and cons for buyers and sellers. It’s important to note that Rocket Mortgage® only offers traditional residential financing.
What Is A Holding Mortgage?
A holding mortgage is a type of mortgage that involves seller financing. Under a holding mortgage agreement, the homeowner acts as a lender to the home buyer, offering them a loan to supplement their purchase. The buyer makes monthly payments to the seller, who retains the property title until the loan has been paid in full.
Most holding mortgages are short-term, and may be amortized to make sure your principal and interest payments are fully paid off over the life of the loan. A holding mortgage agreement will include the terms of the loan, like interest rate and down payment. Depending on state laws, holding mortgages may end with a larger, one-time payment called a balloon payment after 5 years.
Benefits Of A Holding Mortgage For Buyers
When the seller is willing to hold the mortgage, there is more flexibility than with traditional mortgages. Because sellers may have more lenient requirements, this type of seller financing is a viable option for prospective buyers and homeowners who, for whatever reason, might not qualify for a traditional mortgage. Plus, with more flexibility and fewer qualifications, opting for a holding mortgage can speed up the overall home buying process, require lower monthly payments, and allow the buyer a good opportunity to build home equity.
Drawbacks Of A Holding Mortgage For Buyers
Like most things in life, there are downsides to this type of mortgage as well. While lower monthly payments are a possibility, you will most likely be paying a higher interest rate than if you had a traditional mortgage. In addition to higher interest, you could end up paying a large balloon payment at the end of the term, meaning you would have to prepare a savings plan in order to make that final payment, which is often several times the amount of a monthly payment.
One factor that could influence your decision on whether or not this type of mortgage is right for you is the existence of a due-on-sale clause. A due-on-sale clause stipulates that a seller’s outstanding mortgage balance cannot be passed on to the buyer and the buyer must obtain a new mortgage. Without this clause, the outstanding mortgage of the house might influence a buyer’s decision to purchase that property or not!
Another drawback of holding mortgages for buyers is the simple fact that the seller of the property they want to buy might not want to enter into a holding mortgage agreement. Just like for buyers, there are pros and cons to this type of mortgage for sellers as well, and not every seller will think it’s worth the time, money, and effort that goes along with the additional responsibility of holding a mortgage.
Benefits Of A Holding Mortgage For Sellers
For some sellers, holding mortgages are good investment opportunities. When a seller is willing to hold a mortgage, they open a new avenue to earn additional passive income. Even if the buyer defaults on the mortgage, the seller can retain the title and any principal interest already paid. Lenders sometimes sell mortgage notes (think: a real estate IOU) to an investor in exchange for a lump-sum payment — this can be a profitable opportunity for some real estate investors.
Offering this type of mortgage can also attract more buyers to the home who may be willing to negotiate the terms of a holding mortgage. For sellers looking to sell quickly, being flexible with the type of mortgage they are willing to accept could help move the process along.
Drawbacks Of A Holding Mortgage For Sellers
While holding mortgages offer additional options for sellers, there are some drawbacks too, mainly around what happens if a buyer can no longer make their monthly payments. If a buyer defaults on their mortgage, the seller could go into foreclosure or be held responsible for expensive repairs and renovations not made by the buyer. Going through legal procedures because your buyer defaulted on their payments eats up time and money, possibly the time and money you were trying to save by entering into a holding mortgage agreement in the first place.
Additionally, the seller may have to go through a mortgage originator to process the loan, which can take extra time and money to manage on your own.
The Bottom Line On A Holding Mortgage
A holding mortgage is a type of mortgage loan in which the seller acts as the lender and retains the property title. The buyer makes monthly payments directly to the owner. This type of mortgage can be a viable option for buyers who don’t qualify for a traditional mortgage, and an opportunity to earn additional income for the seller.
Buyers should know that holding mortgages usually have a higher interest rate, increasing the overall cost to the buyer. These mortgages also come with additional liability for the seller, who may go into foreclosure or assume responsibility for the condition of the property if the buyer defaults on their payments.
If a traditional mortgage makes more sense for your financial situation, consult with a Rocket Mortgage® professional to find out which path toward homeownership is most beneficial for you.
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