Holding A Mortgage: Defined And Explained
Author:
Megan PolomFeb 25, 2024
•5-minute read
Many types of mortgages are available to accommodate a wide spectrum of borrowers. But what if the typical conditions of a mortgage aren’t appropriate for your situation? One option is to pursue a holding mortgage – an alternative type of home loan used most often by those who may not qualify for a traditional mortgage.
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 non-conforming loan that involves owner financing. Under a holding mortgage agreement, the homeowner acts as a lender to the home buyer, offering them a loan to finance their purchase. The buyer makes monthly payments to the seller, who retains the property title until the loan has been paid in full.
Features Of A Holding Mortgage
A holding mortgage carries with it several features worth noting:
- Duration of the loan: Most holding mortgages are short-term and may not be amortized.
- Type of agreement: The details of a holding mortgage agreement are typically spelled out in a promissory note between the buyer and seller and include conditions of the loan such as interest rate, repayment period and down payment.
- Lump-sum payment: Depending on state laws, holding mortgages may end with a larger, one-time payment called a balloon payment after a certain amount of time.
The holding mortgage contract may also outline how costs such as property taxes and homeowners insurance will be paid. With a traditional lender, these costs are typically rolled into your monthly mortgage payments. But with a holding mortgage, the buyer may be responsible for paying taxes and insurance directly to a government agency and insurance company, respectively.
As a form of nontraditional financing, a holding mortgage won’t work for everyone. Be sure to explore your options so you can see the benefits that other types of loans offer.
Pros And Cons Of Holding A Mortgage For A Buyer: At A Glance
| Pros For Buyers | Cons For Buyers |
|---|---|
| Often more lenient borrower requirements | A potentially higher interest rate |
| The potential to expedite the home buying process | A large balloon payment possibly being due at the end of the repayment term |
| The potential for lower monthly mortgage payments and closing costs | The seller possibly including an alienation clause in the holding mortgage contract |
Pros Of Holding A Mortgage For A Buyer
When the seller is willing to hold the mortgage, there’s more flexibility than with traditional mortgage options. Because sellers may have more lenient requirements, this type of seller financing is a viable option for prospective buyers who, for whatever reason, might not qualify for a traditional mortgage.
With a holding mortgage, borrowers with less-than-perfect credit or high amounts of debt may have an opportunity to work on their qualifying factors for a mortgage refinance. Once they’ve improved factors such as their credit score and debt-to-income ratio (DTI), they can refinance to a traditional mortgage loan.
Also, opting for a holding mortgage can speed up the home buying process, allow for lower monthly payments and give the buyer an opportunity to build home equity.
Cons Of Holding A Mortgage For A Buyer
Like other mortgage options, a holding mortgage has its downsides. While lower monthly payments are a possibility, you’ll most likely be paying a higher interest rate than you would with a traditional mortgage. In addition to higher interest, you could end up paying a large balloon payment at the end of the repayment term, meaning you’d have to prepare enough savings to make that final payment. The balloon payment is often several times the amount of a monthly payment.
Another potential downside of a holding mortgage is that the seller may include a due-on-sale clause, also known as an alienation clause. A due-on-sale clause stipulates that a seller’s outstanding mortgage balance can’t be passed on to the buyer and the buyer must obtain a new mortgage. If an alienation clause is included in the holding mortgage agreement, the new homeowner must pay off the remaining mortgage amount to the previous homeowner (the lender) if they decide to sell in the future.
Another drawback of a holding mortgage for buyers is the simple fact that the home seller might not want to enter into a holding mortgage agreement. As with buyers, this type of mortgage has pros and cons for sellers, and not every seller will believe the additional responsibility of holding a mortgage is worth the time, money and effort.
If you’re considering a holding mortgage, it’s best to take a look at some traditional loans, too. You might be able to qualify for a mortgage that fits your needs without the drawbacks of seller financing.