Holding a Mortgage: Pros and Cons

Though most buyers will use a traditional mortgage to purchase their home, there are other options to explore when it comes to financing a home purchase. If you’re having a difficult time with traditional avenues of home financing – like a home loan from banks or other mortgage lenders or a Federal Housing Administration (FHA) loan – you might want to consider looking into other options such as seller financing. 

One way to obtain seller financing is through a holding mortgage. A holding mortgage is a type of seller financing where a seller agrees to lend money to a buyer to purchase their house and holds the title until the buyer pays off the debt.

A holding mortgage (which is typically a short-term mortgage) can be useful when you’re having a hard time qualifying for a traditional mortgage from a lender. In some cases, a holding mortgage can help facilitate a faster closing, circumventing all the requirements and rules of lender financing.  

Keep reading to learn more about holding a mortgage, how it works and its pros and cons.

What Is a Holding Mortgage?

If an owner agrees to sell their home and provides seller financing, they are acting as the lender. The seller owns the original mortgage after you buy the home and keeps the deed and title until the debt is paid off.

A holding mortgage uses a promissory note or mortgage note to create a contractual agreement between the seller and the buyer of the home. The buyer signs the promissory note, promising to repay the loan according to the terms of the agreement. 

The terms of a holding mortgage can vary. And because holding mortgages are private loans, they aren’t subject to the same rules and requirements that regulate traditional mortgages. 

The seller sets the terms for a holding mortgage, including payments. The payment terms may be amortized, like a traditional fixed-rate mortgage, or may not be amortized, like a balloon mortgage or an interest-only mortgage. 

What Are the Benefits of a Holding Mortgage for Buyers?

If you have no credit or a low credit score, a holding mortgage can benefit home buyers by offering:

• A nontraditional way to finance a home when a buyer is having a difficult time qualifying for a traditional mortgage
• Flexible terms, less red tape and faster closing
• Lower fees and closing costs 

While buyers can save on some expenses with a holding mortgage, that doesn’t necessarily equal overall cost savings.

What Are the Disadvantages of a Holding Mortgage for Buyers?

A holding mortgage isn’t guaranteed to be a perfect solution for every buyer. Like any other mortgage, a holding mortgage has some disadvantages.

• Buyers have fewer consumer protections.
• Buyers may pay a higher interest rate.
• The seller has more control over the terms, which could tilt them in favor of the seller.
• The seller may include an alienation clause (also known as a due-on-sale clause), which requires buyers to pay the entire mortgage balance before the property is transferred or sold to someone else. 

All these disadvantages assume the seller even wants to offer a holding mortgage to a buyer – which is a big if.

What Are the Benefits of a Holding Mortgage for Sellers?

While seller financing isn’t the norm, a holding mortgage can offer a few compelling benefits for sellers. Those benefits include: 

• Passive income from interest payments.
• Potential savings on fees, like real estate agent commissions.
• The ability to treat your home like a real estate investment.
• The ability to sell to a larger pool of buyers, especially in a buyer’s market.
• The ability to avoid some contingencies associated with traditional mortgages, like appraisals.
• The ability to hold the mortgage and preserve property rights to protect your investment.

While sellers are entitled to some protections when holding a mortgage, they do take on certain unavoidable risks.

What Are the Disadvantages of a Holding Mortgage for Sellers?

Lending money is always a risky venture. And the risk is just as high for sellers who are acting as lenders. Some disadvantages of a holding mortgage for sellers include:

• Risk of the buyer defaulting on the mortgage 
• Risk of the buyer damaging or making changes that devalue the property
• Waiting several years to get the full amount owed after the sale
• Conducting due diligence on potential buyers
• Servicing the loan by collecting monthly mortgage payments and paying property taxes

What Can Buyers and Sellers Do To Protect Themselves?

Before agreeing to hold a mortgage, sellers will often qualify buyers by requesting financial information to make sure they can pay back the loan. They may also require a larger down payment to incentivize buyers to make their monthly mortgage payments and avoid losing their down payment in the event of foreclosure.

Before entering into an agreement, buyers and sellers should always consult with an attorney to discuss seller financing laws and limitations. An attorney should also write up the promissory note.

Paying for a House Doesn’t Have To Come From the Bank

Traditional mortgages from lenders are the prevailing method to finance a home purchase, but they aren’t the only way. A holding mortgage is one type of seller financing you can use, but the seller must be willing to offer it, and it can come with stipulations and a higher interest rate.