A variation of the previous two-part mortgage approach is the seller-second program. In this approach, the seller would be the source of the second mortgage loan used for the purchase.
This is sometimes referred to as seller-financing or a seller-held second. Essentially, the seller lends a portion of the property's sale price to the buyer. The seller does not really provide any funds, as the loan amount is taken out of the property's equity, making it a cash-less transaction. However, this second mortgage is considered an actual loan.
Consider the example of Joan who wishes to purchase an undervalued $100,000 home with no down payment. She obtains a non-conforming first mortgage of $80,000, that can be used in a No Down Payment approach. The seller agrees to hold a second mortgage of $20,000.
Joan can then refinance the following year to consolidate both mortgages into one loan. Thus, the seller receives the rest of the sales proceeds. This is actually better for many sellers, because this approach offers some advantageous tax benefits. For more details about this approach, consult the Seller Financing Options section.
This seller-second approach can also be used by investors with low- or no-documented income—so low that they cannot qualify for the first mortgage. This approach can be used with a No Income Verification (NIV) first mortgage, which basically overlooks the borrower's income qualification.
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