Holding a Mortgage: Definition, Pros, and Cons

The homeownership rate in the second quarter of 2023 in the US was around 66%. That’s about 230 million Americans. 

If you are also looking to buy a house, you must understand which type of mortgage is right for you.

A holding mortgage can be a good option for you if you don’t qualify for a traditional mortgage. Throughout the past year, around 83,647 people have opted for a holding mortgage. Let’s understand the definition, pros, and cons of holding a mortgage.

What Is a Holding Mortgage?

A holding mortgage is a non-conforming loan that involves owner financing. Here, the homeowner serves as a lender who offers a loan to the buyer. The payments are made monthly to the owner and they hold 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 lump-sum payment may be required after a certain period.

Benefits of Holding a Mortgage for Buyers

It provides an alternative option for buyers who may not qualify for traditional types of home loans. Here are some benefits for buyers:

• Lenient Terms: The conditions can be tailored to meet the specific needs of the buyer and seller.
• More Opportunities To Negotiate: Buyers may have a greater opportunity to negotiate lower interest rates and down payments. 
• Shorter Loan Term: Holding mortgages typically have a shorter term than traditional mortgages, allowing buyers to pay off their debt faster.
• No Upfront Amount: Buyers may avoid the need for a large, upfront payment, such as a down payment or closing costs.

Additionally, holding mortgages can be a helpful option for buyers who plan to make repairs to the property. It allows them to finance both the purchase and renovation costs together.

Drawbacks of Holding a Mortgage for Buyers

Here are some drawbacks of holding mortgages for a buyer:

• Higher Interest Rates: It may come with higher interest rates than traditional mortgages.
• Can Be Risky: Unlike traditional mortgages, these mortgages aren’t usually regulated by the same consumer protection laws. Therefore, if proper legal proceedings are not followed, the buyer can lose his stake if the seller denies the deal.
• Seller Bankruptcy: The seller holding the title can risk the buyer’s investment. This situation can arise if the seller experiences financial difficulties or bankruptcy.

Apart from this, buyers may have a hard time finding a lender to refinance their holding mortgage.

Benefits of a Holding Mortgage for Sellers

Holding a Mortgage helps sellers attract a wider pool of buyers. Let’s map out the key benefits for the sellers:

• Higher Interest Returns: Sellers can receive interest on the loan they offer, and earn a higher return than other investment options.
• Full Control of the Deal: Sellers get to decide the loan terms, including the interest rate, repayment period, and down payment. This gives them more control over the sale.
• Reduction of Tax Burden: Holding mortgages can be a good option for sellers who want to spread out their income over time. As a result, they might be able to lower their tax obligations.

Importantly, if the buyer defaults on the loan, the seller can take back the property and keep any payments made up to that point. This will safeguard the seller from financial losses.

Drawbacks of a Holding Mortgage for Sellers

There are risks associated with a holding mortgage, such as the possibility of a buyer’s default. This could also result in a foreclosure process. Here are some drawbacks of holding a mortgage for the sellers:

• Possibility of Legal Action: The seller may have to enforce mortgage terms if the buyer defaults. This may include hiring an attorney or collection agency.
• Tax Implications: Sellers may be subject to tax implications, such as having to declare interest earned on the loan as taxable income.
• Property Tax and Insurance Burden: The sellers have to pay their own mortgage, property taxes, and insurance, until the buyer pays off the complete loan. 

Additionally, holding a mortgage limits the seller’s ability to invest in other opportunities or use the money from the sale for different purposes.

Consult a Real Estate Attorney Before Holding a Mortgage

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

Buyers and sellers must consult with a real estate attorney before they enter into an agreement. An attorney should write up the promissory note and explain seller financing laws.

» Real Estate Attorneys: Find the best real estate attorneys near you.

Tax Implications

As a seller, spreading the gain of holding a mortgage over a number of years is possible if the gain is reported as an “installment sale”. Enabling the seller to spread the gain over several years. This helps in reducing the tax burden compared to paying all the capital gains in the first year.

For instance, when the seller is holding a mortgage and the mortgage agreement lists the loan as an interest-only loan. This strategy can enable the seller to evade tax on their returns.

Having said that, we advise you to consult a tax expert before you take the final call.

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

As mentioned above, holding a mortgage has both drawbacks and benefits. So, research well before embarking on your journey of home ownership.

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Frequently Asked Questions

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