Holding A Mortgage: Defined And Explained

Many types of mortgages are available to accommodate a wide spectrum of borrowers. But what if the typical conditions of a mortgage aren’t appropriate for your situation? One option is to pursue a holding mortgage – an alternative type of home loan used most often by those who may not qualify for a traditional mortgage.

It’s important to note that Rocket Mortgage^® only offers traditional residential financing.

What Is A Holding Mortgage?

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.

Features Of A Holding Mortgage

A holding mortgage carries with it several features worth noting:

• Duration of the loan: Most holding mortgages are short-term and may not be amortized.
• Type of agreement: The details of a holding mortgage agreement are typically spelled out in a promissory note between the buyer and seller and include conditions of the loan such as interest rate, repayment period and down payment.
• Lump-sum 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 such as property taxes and homeowners insurance will be 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, respectively.

As a form of nontraditional financing, a holding mortgage won’t work for everyone. Be sure to explore your options so you can see the benefits that other types of loans offer.

Pros And Cons Of Holding A Mortgage For A Buyer: At A Glance

Pros Of Holding A Mortgage For A Buyer

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 such as their credit score and debt-to-income ratio (DTI), they can refinance to a traditional mortgage loan.

Also, opting for a holding mortgage can speed up the home buying process, allow for lower monthly payments and give the buyer an opportunity to build home equity.

Cons Of Holding A Mortgage For A Buyer

Like other mortgage options, a holding mortgage has its downsides. While lower monthly payments are a possibility, you’ll most likely be paying a higher interest rate than you would with a traditional mortgage. In addition to higher interest, you could end up paying a large balloon payment at the end of the repayment term, meaning you’d 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 must pay off the remaining mortgage amount to the previous homeowner (the lender) if they decide to sell in the future.

Another drawback of a holding mortgage for buyers is the simple fact that the home seller might not want to enter into a holding mortgage agreement. As with buyers, this type of mortgage has pros and cons for sellers, and not every seller will believe 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.

Pros And Cons Of A Holding Mortgage For A Seller: At A Glance

Pros Of A Holding Mortgage For A Seller

For some sellers, a holding mortgage is a good investment opportunity. 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, creating 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 conditions 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.

Cons Of A Holding Mortgage For A Seller

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.

Navigating 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.

The Bottom Line: A Mortgage Hold Carries Certain Risks

A holding mortgage can be a viable option for home 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 their overall cost. These mortgages also come with additional liability for the seller, who may have to initiate foreclosure or assume responsibility for the state of the property if the buyer defaults on their payments.

If a traditional home loan works better for your financial circumstances, you can get started today with an approval from Rocket Mortgage.