Many types of mortgages are available to accommodate a wide spectrum of borrowers. But what if the typical terms of a mortgage aren’t appropriate for your situation? One option is to get something called a holding mortgage – an alternative type of home loan typically used for those who may not qualify for a traditional mortgage.
Let’s delve a bit deeper into how a holding mortgage works. Then, we’ll look at the pros and cons of holding mortgages for buyers and sellers.
It’s important to note that Rocket Mortgage ® only offers traditional residential financing.
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.
Most holding mortgages are short-term and may not be amortized. The details of a holding mortgage agreement are typically laid out in a promissory note between the buyer and seller and include the terms of the loan, like the interest rate, repayment period and down 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 like property taxes and homeowners insurance are 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.
As a form of nontraditional financing, a holding mortgage won’t work for everyone. Make sure you explore your options to see the benefits that other types of loans offer.
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 like their credit score and debt-to-income ratio (DTI), they can refinance to a traditional mortgage loan.
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 an opportunity to build home equity.
Like other mortgage options, a holding mortgage has its own set of downsides. While lower monthly payments are a possibility, you’ll 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 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 is required to pay off the remaining mortgage amount to the previous homeowner (the lender) if they decide to sell in the future.
Another drawback of holding mortgages for buyers is the simple fact that the home seller might not want to enter into a holding mortgage agreement. Just like for buyers, this type of mortgage has pros and cons for sellers, and not every seller will think 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.
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 and interest already paid. Mortgage lenders sometimes sell mortgage notes (think: a real estate IOU) to an investor in exchange for a lump-sum payment, which can be a profitable opportunity for some real estate investors.
Offering this type of mortgage can also attract more buyers 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’re willing to accept could help move the process along.
While holding mortgages offer additional options for sellers, they have some drawbacks, too – mainly around what happens if a potential buyer can no longer make their monthly payments. If a buyer defaults on their mortgage, they could go into foreclosure and the seller may have to pay for expensive repairs and renovations.
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.
A holding mortgage is a type of mortgage loan where 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 it can be an opportunity for the seller to earn additional income.
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 have to initiate foreclosure or assume responsibility for the condition of the property if the buyer defaults on their payments.
If a traditional home loan makes more sense for your financial situation, you can get started today with an approval from Rocket Mortgage.
Megan is a writer out of Metro Detroit. Born and raised in the Mitten, she studied creative writing at Michigan State University and spent time abroad teaching English in South Korea. When she’s not writing for Rocket Companies, she’s usually listening to a podcast, on a hike, or learning to cook something new.
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