Home-seller financing not without risk

How to guard against loss if buyer defaults

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"When does it make sense for a home seller to take back a second mortgage?" Most sellers who take back second mortgages from buyers view them as investments that can yield an attractive rate of return. However, I don't view them as very good investments unless a seller can obtain a higher price on the sale. While the promised rate may be high, second mortgages are riskier than first mortgages, and few sellers are qualified to assess the risk. Borrowers who get into payment trouble sometimes stop paying on the second while continuing to pay on the first mortgage, gambling that the second mortgage lender won't do anything about it. Forcing a borrower into foreclosure is costly, and because the second mortgage lender gets paid only after the first mortgage lender has been paid in full, there may be nothing left. A second problem is that mortgages must be serviced, which few sellers are equipped to do effectively. A moderately intelligent seller can learn to keep track of payments and ...