Finding your dream home doesn't necessarily mean you automatically get to live happily ever after in it. First, you have to obtain the mortgage you need to grab hold of the keys. If your mortgage lender won't grant enough to cover the whole bill, a motivated seller may agree to hold a second mortgage for you. This means he finances the difference between the amount you can pay and the amount he wants for the property. It also means you have two mortgages to pay: one to a traditional lender and another to the seller.
A First Mortgage
Secure a first mortgage that is as close to the sale price as possible. A seller may prove more interested in your offer if she doesn't have to hold a large second mortgage. Scrape together as much as you can as a down payment, as the more cash you have to offer, the less the seller will have to finance to help you buy her property. Since holding a second mortgage for a buyer can be risky, you want to make the deal as attractive as possible.
Permission of Your Lender
Get your first mortgage lender's permission. Though you might find a motivated seller to hold a second mortgage for you, this doesn't necessarily mean the deal will fly with your lender. In considering the risk of lending you the money to buy a home, your lender will want to know all of the details of your financial situation, including where you will get the money it doesn't provide. If your lender thinks the second mortgage will prove too hard for you to pay, it may not grant permission.
The amount of second mortgage the seller holds depends on the loan you qualify for with a mortgage lender and the amount of cash you have for a down payment. Often, a first mortgage provides about 80 percent of the sale price of a home and the seller holds a second mortgage to cover the remaining 20 percent. If you have money to offer as a down payment, you may need the seller to finance less of your purchase. For example, if your first mortgage provides 80 percent of the sale price and you have a 10 percent down payment, the seller may hold a 10 percent second mortgage to help you buy the property.
Second Mortgage Negotiation
Negotiate with the seller to pin down the second mortgage deal you want. Negotiations may cover the final sale price, down payment, how much you'll owe the seller in total, how long you'll have to repay the second mortgage, and estimates of your interest and second mortgage payments. Avoid agreeing to more than you can comfortably afford. Starting home ownership on shaky ground may make foreclosure more likely.
Sign a promissory note with your seller. A promissory note details your promise to repay the second mortgage the seller extends. This document spells out the terms of your second mortgage in detail, including the amount you have to repay and the length of time you have to repay it. Get the agreement in writing and ask a lawyer to review it before you sign. A lawyer may find loopholes or questionable clauses capable of causing problems for you later.
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