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5 min read May 15, 2023

Holding A Mortgage: Definition, Pros, And Cons

Lenders offer various mortgages for different borrowers. But what if the terms don’t fit your needs? Consider a holding mortgage, an alternative for those who can’t qualify for a traditional one.

Let’s look at the definition, pros, and cons of holding a mortgage in more detail.

What Is A Holding Mortgage?

A holding mortgage is a non-conforming loan with owner financing. The homeowner acts as a lender, offering the buyer a loan. Payments are made monthly to the seller, who holds the title until the loan is paid in full.

Most holding mortgages are short-term and may not be amortized. A promissory note outlines the terms, such as interest rate and down payment. Depending on state laws, a balloon payment may be required after a certain period.

Benefits Of Holding A Mortgage For A Buyer

  • Holding a mortgage provides an alternative option for buyers who may not qualify for traditional mortgages
  • The terms can be tailored to the specific needs of the buyer and seller
  • Buyers may have a better chance of negotiating lower interest rates and down payments with a holding mortgage
  • Holding mortgages typically have a shorter term than traditional mortgages, allowing buyers to pay off their debt faster
  • Buyers may avoid the need for a large, upfront payment, such as a down payment or closing costs, which can be prohibitive for some
  • Holding mortgages can be a helpful option for buyers who plan to make improvements to the property, as it allows them to finance both the purchase and renovation costs together

Drawbacks Of Holding A Mortgage For A Buyer

  • Holding a mortgage may come with higher interest rates than traditional mortgages
  • Buyers may have to make a large balloon payment at the end of the loan term
  • Holding mortgages are not always regulated or subject to the same consumer protection laws as traditional mortgages
  • If the seller holds the title, buyers may face the risk of losing their investment if the seller experiences financial difficulties or bankruptcy
  • Buyers may have a harder time finding a lender who will refinance their holding mortgage or a buyer who will assume the loan if they want to sell the property before the loan is paid off

Benefits Of A Holding Mortgage For Sellers

  • Holding a mortgage can help sellers attract a wider pool of potential buyers, including those who may not qualify for traditional mortgages
  • Sellers can earn interest on the loan they provide, potentially earning a higher return than other investment options
  • Sellers can choose the terms of the loan, including the interest rate, repayment period, and down payment, giving them more control over the sale
  • Holding mortgages can be a good option for sellers who want to spread out their income over time, potentially reducing their tax liability
  • If the buyer defaults on the loan, the seller can take back the property and keep any payments made up to that point, potentially minimizing financial losses

Drawbacks Of A Holding Mortgage For Sellers

  • Holding a mortgage comes with risks, including the potential for buyer default, which can lead to a lengthy and expensive foreclosure process
  • If the buyer defaults, the seller may have to spend time and money enforcing the mortgage terms, including hiring an attorney or collection agency
  • Sellers who hold a mortgage may face tax implications, including having to report the interest earned on the loan as taxable income
  • Sellers may be required to continue paying their own mortgage, property taxes, and insurance until the buyer pays off the loan in full
  • The process may limit the seller’s ability to invest in other opportunities or use the money from the sale for different purposes

What Can Buyers and Sellers Do To Protect Themselves?

Sellers often request financial info to qualify buyers before holding a mortgage. They may request a larger down payment to motivate timely payments and avoid foreclosure.

Buyers and sellers must consult with an attorney before the agreement. An attorney should write up the promissory note and explain seller financing laws.

Is Holding a Mortgage a Good Way To Make Money?

Providing an owner-financed mortgage can help sellers make money and build wealth. Financing the sale can lead to a win-win solution and a competitive price. Sellers can earn extra money through monthly mortgage payments and interest.

Professional help can increase the chances of finding a qualified buyer. But there’s a risk, as buyers may default or neglect the property. Despite the risk, many sellers find holding a mortgage note worth the potential financial gain.

Bottom Line

In a holding mortgage, the seller acts as the lender and retains the property title. Buyers make monthly payments directly to the owner. It’s a viable option for those who don’t qualify for traditional mortgages.

Sellers can earn additional income. Buyers should expect a higher interest rate and additional liability for the seller. The seller may have to initiate foreclosure or assume responsibility for the property’s condition if the buyer defaults.

Frequently Asked Questions

1. What is the average holding period for a mortgage?

The average holding period for a mortgage is 30 years.

2. Can I hold a mortgage for my child?

Yes. If you have enough financial security and funds you may become the lender for your child. You can give funds to your child and take a mortgage against the property.

3. Who owns the house in a mortgage?

As a borrower, you own your home as long as you meet the terms of your mortgage. However, your home is collateral for the mortgage.


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